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The Empirical Failure of the Expectations Hypothesis of the Term Structure of Bond Yields

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  • Giorgio Valente
  • Daniel Thornton
  • Lucio Sarno

Abstract

This paper tests the expectations hypothesis (EH) using US monthly data for bond yields spanning the 1952-2003 sample period and ranging in maturity from 1 month to 10 years. We apply the Lagrange multiplier test developed by Bekaert and Hodrick (2001) and extend it to increase the test power: (a) by introducing economic variables as conditioning information; and (b) by using more than two bond yields in the model and testing the EH jointly on more than one pair of yields. While the conventional bivariate procedure provides mixed results, the more powerful testing procedures suggest rejection of the EH throughout the maturity spectrum examined. ; Earlier titles: Testing the expectations hypothesis: some new evidence, New evidence on the expectations hypothesis of the term structure of bond yields

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Bibliographic Info

Paper provided by Warwick Business School, Financial Econometrics Research Centre in its series Working Papers with number wp05-13.

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Date of creation: 2005
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Handle: RePEc:wbs:wpaper:wp05-13

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Citations

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Cited by:
  1. Suzan Hol, 2006. "Determinants of long-term interest rates in the Scandinavian countries," Discussion Papers 469, Research Department of Statistics Norway.
  2. Osmani T. Guillen & Benjamin M. Tabak, 2008. "Characterizing the Brazilian Term Structure of Interest Rates," Working Papers Series 158, Central Bank of Brazil, Research Department.
  3. Erdenebat Bataa & Dong H. Kim & Denise R. Osborn, 2007. "Expectations Hypothesis Tests in the Presence of Model Uncertainty," Discussion Paper Series 0703, Institute of Economic Research, Korea University.
  4. Daniel L. Thornton & Giorgio Valente, 2009. "Revisiting the predictability of bond risk premia," Working Papers 2009-009, Federal Reserve Bank of St. Louis.
  5. Andrade, Sandro C. & Barrett, W. Brian, 2011. "Can broker-dealer client surveys provide signals for debt investing?," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1170-1178, May.
  6. Stephen Hall & Kavita Sirichand, 2010. "Economic Value of Stock and Interest Rate Predictability in the UK," Discussion Papers in Economics 10/13, Department of Economics, University of Leicester.
  7. Daniel L. Thornton, 2012. "Monetary policy: why money matters, and interest rates don’t," Working Papers 2012-020, Federal Reserve Bank of St. Louis.
  8. Daniel L. Thornton, 2009. "How did we get to inflation targeting and where do we go now? a perspective from the U.S. experience," Working Papers 2009-038, Federal Reserve Bank of St. Louis.
  9. Silva Lopes, Artur C. & M. Monteiro, Olga Susana, 2007. "The expectations hypothesis of the term structure: some empirical evidence for Portugal," MPRA Paper 3437, University Library of Munich, Germany.
  10. Massimo Guidolin & Daniel L. Thornton, 2010. "Predictions of short-term rates and the expectations hypothesis," Working Papers 2010-013, Federal Reserve Bank of St. Louis.
  11. Olga Susana M. Monteiro & Artur C. B. da Silva Lopes, 2010. "Short- and Long-Run Tests of the Expectations Hypothesis: The Portuguese Case," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 56(3), pages 257-280.
  12. Della Corte, Pasquale & Sarno, Lucio & Thornton, Daniel L, 2007. "The Expectation Hypothesis of the Term Structure of Very Short-Term Rates: Statistical Tests and Economic Value," CEPR Discussion Papers 6445, C.E.P.R. Discussion Papers.
  13. Lange, Ronald H., 2010. "Regime-switching monetary policy in Canada," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 782-796, September.
  14. Bruce Mizrach & Christopher J. Neely, 2007. "Information shares in the U.S. treasury market," Working Papers 2005-070, Federal Reserve Bank of St. Louis.
  15. Stephen Hall & Kavita Sirichand, 2010. "Decision-Based Forecast Evaluation of UK Interest Rate Predictability," Discussion Papers in Economics 10/09, Department of Economics, University of Leicester.
  16. Queijo von Heideken, Virginia, 2008. "Monetary Policy Regimes and the Volatility of Long-Term Interest Rates," Working Paper Series 220, Sveriges Riksbank (Central Bank of Sweden).

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