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Testing the expectations hypothesis: some new evidence for Japan

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  • Daniel L. Thornton

Abstract

The deregulation of the Japanese financial markets and the adoption of an interest rate policy instrument by the Bank of Japan prompted a number of empirical investigations of the expectation hypothesis (EH) of the term structures of interest rates in Japan. This paper is a continuation of this research. It deviates from the previous work on the EH in Japan in two respects. It tests the EH by estimating a general vector autoregression (VAR) of the long-term and short-term rates and testing the restrictions implied by the EH on the VAR using a Lagrange multiplier test. In addition, the issue of stationarity of interest rates is considered. The paper not only considers the possibility that Japanese interest rates are nonstationary, but analyzes the implications of non-stationarity for the EH.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2003-033.

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Date of creation: 2003
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Publication status: Published in Monetary and Economic Studies, May 2004, 22(2), pp. 45-69
Handle: RePEc:fip:fedlwp:2003-033

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Keywords: Monetary policy - Japan ; Interest rates - Japan;

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  1. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 785, Cowles Foundation for Research in Economics, Yale University.
  2. Sarno, Lucio & Thornton, Daniel L., 2003. "The dynamic relationship between the federal funds rate and the Treasury bill rate: An empirical investigation," Journal of Banking & Finance, Elsevier, vol. 27(6), pages 1079-1110, June.
  3. John Y. Campbell & Yasushi Hamao, 1993. "The Interest Rate Process and the Term Structure of Interest Rates in Japan," NBER Chapters, in: Japanese Monetary Policy, pages 95-120 National Bureau of Economic Research, Inc.
  4. Campbell, John Y & Shiller, Robert J, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(3), pages 495-514, May.
  5. Geert Bekaert & Robert J. Hodrick & David A. Marshall, 1997. ""Peso Problem" Explanations for Term Structure Anomalies," NBER Working Papers 6147, National Bureau of Economic Research, Inc.
  6. Daniel L. Thornton, 2004. "Tests of the expectations hypothesis: resolving the Campbell-Shiller paradox," Working Papers, Federal Reserve Bank of St. Louis 2003-022, Federal Reserve Bank of St. Louis.
  7. Iryna Kaminska & Andrea Carriero & Carlo A. Favero, 2004. "Financial Factors, Macroeconomic Information and the Expectations Theory of the Term Structure of Interest Rates," Computing in Economics and Finance 2004, Society for Computational Economics 76, Society for Computational Economics.
  8. Okina, Kunio & Shiratsuka, Shigenori, 2004. "Policy commitment and expectation formation: Japan's experience under zero interest rates," The North American Journal of Economics and Finance, Elsevier, vol. 15(1), pages 75-100, March.
  9. Balduzzi, Pierluigi & Bertola, Giuseppe & Foresi, Silverio, 1997. "A model of target changes and the term structure of interest rates," Journal of Monetary Economics, Elsevier, Elsevier, vol. 39(2), pages 223-249, July.
  10. Daniel L. Thornton, 2003. "Monetary policy transparency: transparent about what?," Manchester School, University of Manchester, vol. 71(5), pages 478-497, 09.
  11. Clemens J. M. Kool & Daniel L. Thornton, 2003. "A note on the expectations hypothesis at the founding of the Fed," Working Papers, Federal Reserve Bank of St. Louis 2000-004, Federal Reserve Bank of St. Louis.
  12. Daniel L. Thornton, 1985. "Money demand dynamics: some new evidence," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 14-23.
  13. Engsted, Tom & Tanggaard, Carsten, 1994. "Cointegration and the US term structure," Journal of Banking & Finance, Elsevier, vol. 18(1), pages 167-181, January.
  14. Glenn D. Rudebusch, 2001. "Term structure evidence on interest rate smoothing and monetary policy inertia," Working Paper Series 2001-02, Federal Reserve Bank of San Francisco.
  15. William Poole & Robert H & Rasche & Daniel L. Thornton, 2002. "Market anticipations of monetary policy actions," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 65-94.
  16. Geert Bekaert & Robert J. Hodrick, 2000. "Expectations Hypotheses Tests," NBER Working Papers 7609, National Bureau of Economic Research, Inc.
  17. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-26, February.
  18. Takagi, Shinji, 1988. "Recent developments in Japan's bond and money markets," Journal of the Japanese and International Economies, Elsevier, vol. 2(1), pages 63-91, March.
  19. David A. Dickey & Dennis W. Jansen & Daniel L. Thornton, 1991. "A primer on cointegration with an application to money and income," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 58-78.
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Citations

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Cited by:
  1. Daniel L. Thornton, 2005. "Predictions of short-term rates and the expectations hypothesis of the term structure of interest rates," Working Papers, Federal Reserve Bank of St. Louis 2004-010, Federal Reserve Bank of St. Louis.
  2. Kagraoka, Yusho & Moussa, Zakaria, 2013. "Quantitative easing, credibility and the time-varying dynamics of the term structure of interest rate in Japan," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 25(C), pages 181-201.
  3. Filippo COSSETTI & Francesco GUIDI, 2009. "ECB Monetary Policy and Term Structure of Interest Rates in the Euro Area: an Empirical Analysis," Working Papers, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali 334, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
  4. Zhu, Xiaoneng, 2011. "Revisiting the expectations hypothesis: The Japanese term structure and regime shifts," Journal of Economics and Business, Elsevier, Elsevier, vol. 63(3), pages 237-249, May.
  5. Mark J. Holmes & Jesús Otero & Theodore Panagiotidis, 2010. "The Term Structure of Interest Rates, the Expectations Hypothesis and International Financial Integration: Evidence from Asian Economies," Working Paper Series, The Rimini Centre for Economic Analysis 34_10, The Rimini Centre for Economic Analysis.
  6. Mohamed Z. M. Aazim & Nawalage S. Cooray, 2010. "Monetary Policy and Yield Curve Dynamics in an Emerging Market: Sri Lankan Perspectives," Working Papers, Research Institute, International University of Japan EMS_2010_11, Research Institute, International University of Japan.
  7. Jun Nagayasu, 2003. "The Term Structure of Interest Rates and Monetary Policy During a Zero-Interest-Rate Period," IMF Working Papers 03/208, International Monetary Fund.
  8. Charles Goodhart, 2009. "The Interest Rate Conditioning Assumption," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 5(2), pages 85-108, June.
  9. Azar, Samih Antoine, 2010. "Testing the Expectations Hypothesis on Corporate Bond Yields," Review of Applied Economics, Review of Applied Economics, Review of Applied Economics, vol. 6(1-2).

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