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Does the choice of interest rate data matter for the results of tests of the expectations hypothesis - some results for the UK

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  • Christian Mose Nielsen

    (Department of Economics, Politics and Public Administration, Aalborg University)

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    Abstract

    Using UK data for the period 1997:3 to 2005:5, this paper examines whether the expectations hypothesis is supported by recent UK data when the short-end of the term structure of interest rates is considered and whether the results of the tests of the expectations hypothesis are sensitive to the choice of data. The main results can be nicely summarized by considering five virtual researchers who test the expectations hypothesis using five different data sets for the 1997:3 to 2005:5 period for the 1 to 12-month maturity spectrum and who get quite different results. The main conclusion to be drawn from the analysis in this paper is thus that robustness check may be very important when testing the expectations hypothesis using the 1 to 12-month maturity spectrum of the term structure. Furthermore, the results suggest that the specific data set used in tests of the expectations hypothesis may be a candidate explanation of a rejection of the expectations hypothesis - along with the possibility that a time-varying term premium and/or a structural break are responsible for the rejection

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    File URL: http://repec.org/mmf2006/up.18453.1145733695.pdf
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    Bibliographic Info

    Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2006 with number 132.

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    Date of creation: 02 Feb 2007
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    Handle: RePEc:mmf:mmfc06:132

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    Web page: http://www.essex.ac.uk/afm/mmf/index.html

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    Keywords: Expectations hypothesis;

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    1. Campbell, John Y & Shiller, Robert J, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 495-514, May.
    2. Engsted, Tom & Tanggaard, Carsten, 1995. " The Predictive Power of Yield Spreads for Future Interest Rates: Evidence from the Danish Term Structure," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(1), pages 145-59, March.
    3. Stefan Gerlach & Frank Smets, 1997. "Exchange rate regimes and the expectations hypothesis of the term structure," BIS Working Papers 43, Bank for International Settlements.
    4. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," Cowles Foundation Discussion Papers 785, Cowles Foundation for Research in Economics, Yale University.
    5. Gerlach, Stefan & Smets, Frank, 1995. "The Term Structure of Euro-Rates: Some Evidence in Support of the Expectations Hypothesis," CEPR Discussion Papers 1258, C.E.P.R. Discussion Papers.
    6. Nicola Anderson & John Sleath, 2001. "New estimates of the UK real and nominal yield curves," Bank of England working papers 126, Bank of England.
    7. Kugler, Peter, 2002. "The term premium, time varying interest rate volatility and central bank policy reaction," Economics Letters, Elsevier, vol. 76(3), pages 311-316, August.
    8. Bennett T. McCallum, 1994. "Monetary Policy and the Term Structure of Interest Rates," NBER Working Papers 4938, National Bureau of Economic Research, Inc.
    9. Christopher Adam & David Cobham & Eric Girardin, 2005. "Monetary Frameworks and Institutional Constraints: UK Monetary Policy Reaction Functions, 1985-2003," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(4), pages 497-516, 08.
    10. Tzavalis, Elias & Wickens, Michael R, 1997. "Explaining the Failures of the Term Spread Models of the Rational Expectations Hypothesis of the Term Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 364-80, August.
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