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Testing the Expectations Hypothesis of the Term Structure of Interest Rates in the Presence of a Potential Regime Shift

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Author Info
Lanne, Markku () (University of Helsinki)

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Abstract

The expectations hypothesis of the term structure of interest rates is tested using monthly Eurodollar deposit rates for maturities 1, 3 and 6 months covering the period 1983:1–1996:6. Whereas classical regression-based tests indicate rejection, tests based on a new model allowing for potential – but unrealized – regime shifts provide support for the expectations hypothesis. The peso problem is modelled by means of a threshold autoregression. The estimation results suggest that potential regime shift had an effect on expectations concerning the longer-term interest rate only for a short while in the early phase of the sample period, when interest rates were at their highest.

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File URL: http://www.bof.fi/NR/rdonlyres/3931D15F-373A-48A3-886D-1A1E73FCADEE/0/9920.pdf
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Publisher Info
Paper provided by Bank of Finland in its series Research Discussion Papers with number 20/1999.

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Length: 19 pages
Date of creation: 21 Dec 1999
Date of revision:
Handle: RePEc:hhs:bofrdp:1999_020

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.bof.fi/en/tutkimus
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Related research
Keywords: peso problem; TAR models; term structure of interest rates;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May. [Downloadable!] (restricted)
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  2. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423. [Downloadable!] (restricted)
  3. Clements, Michael P. & Smith, Jeremy, 1997. "The performance of alternative forecasting methods for SETAR models," International Journal of Forecasting, Elsevier, vol. 13(4), pages 463-475, December. [Downloadable!] (restricted)
  4. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-30, March. [Downloadable!] (restricted)
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  5. Bekaert, Geert & Hodrick, Robert J. & Marshall, David A., 1997. "On biases in tests of the expectations hypothesis of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 44(3), pages 309-348, June. [Downloadable!] (restricted)
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  6. Jaaskela, J. & Vilmunen, J., 1999. "Anticipated Monetary Policy and the Dynamic Behaviour of the Term Structure of Interest Rate," Bank of Finland - Studies in Economics and Finance 12/99, Bank of Finland. Research Department..
  7. Balduzzi, Pierluigi & Bertola, Giuseppe & Foresi, Silverio, 1997. "A model of target changes and the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 223-249, July. [Downloadable!] (restricted)
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  8. Saikkonen, Pentti & Ripatti, Antti, 2000. "On the Estimation of Euler Equations in the Presence of a Potential Regime Shift," Manchester School, University of Manchester, vol. 68(0), pages 92-121, Supplemen. [Downloadable!] (restricted)
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  9. Campbell, John Y & Shiller, Robert J, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Blackwell Publishing, vol. 58(3), pages 495-514, May. [Downloadable!] (restricted)
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  10. Martin D.D. Evans, 1995. "Peso Problems: Their Theoretical and Empirical Implications," Working Papers 95-05, New York University, Leonard N. Stern School of Business, Department of Economics.
  11. Hansen, Bruce E, 1999. " Testing for Linearity," Journal of Economic Surveys, Blackwell Publishing, vol. 13(5), pages 551-76, December. [Downloadable!] (restricted)
  12. repec:att:wimass:1919997 is not listed on IDEAS
  13. Gerlach, Stefan & Smets, Frank, 1997. "The term structure of Euro-rates: some evidence in support of the expectations hypothesis," Journal of International Money and Finance, Elsevier, vol. 16(2), pages 305-321, April. [Downloadable!] (restricted)
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  14. Sola, Martin & Driffill, John, 1994. "Testing the term structure of interest rates using a stationary vector autoregression with regime switching," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 601-628. [Downloadable!] (restricted)
  15. Bekaert, Geert & Hodrick, Robert J. & Marshall, David A., 2001. "Peso problem explanations for term structure anomalies," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 241-270, October. [Downloadable!] (restricted)
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  16. Andrews, Donald W K, 1989. "Power in Econometric Applications," Econometrica, Econometric Society, vol. 57(5), pages 1059-90, September. [Downloadable!] (restricted)
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  17. Francis X. Diebold & Joon-Haeng Lee & Gretchen C. Weinbach, 1993. "Regime switching with time-varying transition probabilities," Working Papers 93-12, Federal Reserve Bank of Philadelphia.
  18. Pierluigi Balduzzi & Giuseppe Bertola & Silverio Foresi & Leora Klapper, 1997. "Interest Rate Targeting and the Dynamics of Short-Term Rates," NBER Working Papers 5944, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. Martin D. Evans & Karen K. Lewis, 1992. "Do Stationary Risk Premia Explain It All? Evidence from the Term Structure," Working Papers 92-11, New York University, Leonard N. Stern School of Business, Department of Economics.
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  20. Jääskelä, Jarkko & Vilmunen, Jouko, 1999. "Anticipated Monetary Policy and the Dynamic Behaviour of the Term Structure of Interest Rates," Research Discussion Papers 12/1999, Bank of Finland. [Downloadable!]
  21. Markku Lanne, 1999. "Near Unit Roots And The Predictive Power Of Yield Spreads For Changes In Long-Term Interest Rates," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 393-398, August. [Downloadable!] (restricted)
  22. Kugler, Peter, 1996. "The term structure of interest rates and regime shifts: Some empirical results," Economics Letters, Elsevier, vol. 50(1), pages 121-126, January. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Balázs Romhányi, 2005. "A learning hypothesis of the term structure of interest rates," Macroeconomics 0503001, EconWPA. [Downloadable!]
  2. Osmani Teixeira de Carvalho Guillén & Benjamin M. Tabak?, 2007. "Characterizing The Brazilian Term Structure Of Interest Rates," Anais do XXXV Encontro Nacional de Economia [Proceedings of the 35th Brazilian Economics Meeting] 108, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
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