Nested Tests of Alternative Term-Structure Theories
AbstractControversies in term-structure theory center around the existence and variability of term premia in securities yields. In this paper, the term premium on a default-free n-period bond is defined as the difference between its observable yield to maturity and the average expected per-annum rate of return on an n-period strip of rollover investments in one-period bonds. To test alternative term-structure theories without introducing ex post proxies for expectational variables, this paper uses a set of cross-section interest-rate forecasts collected jointly with Burton Malkiel of Princeton University from a population of large institutional lenders at four different phases of a single interest-rate cycle. Statistical tests strongly confirm the existence of nonzero term premia at each survey date, thereby rejecting the pure-expectations theory of the term structure. Additional tests are unable to reject restrictions implied by the liquidity-premium hypothesis that term premia should be positive and increase with maturity. Finally, contrary to the martingale hypothesis, ex ante term-premium data vary significantly overtime and show a positive association with the level of interest rates.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0639.
Date of creation: Mar 1981
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- Kane, Edward J, 1983. "Nested Tests of Alternative Term-Structure Theories," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 115-23, February.
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- Nourzad, Farrokh & Scott Grennier, R., 1995. "Cointegration analysis of the expectations theory of the term structure," Journal of Economics and Business, Elsevier, vol. 47(3), pages 281-292, August.
- Jay B. Morrison & David H. Pyle, 1978. "Interest Rate Risk and the Regulation of Financial Institutions," NBER Working Papers 0266, National Bureau of Economic Research, Inc.
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