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Time Varying Term Premia and Traditional Hypotheses about the Term Structure

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  • Longstaff, Francis A

Abstract

Empirical evidence of time varying term premia in bond returns is frequently interpreted as evidence against the expectations hypothesis. This paper shows that the expectations hypothesis can actually imply time varying term premia if the time frame for which the expectations hypothesis holds differs from the return measurement period. Furthermore, many of the properties of these term premia are consistent with those of observed term premia. These results are important because they imply that the case against the expectations hypothesis is weaker than claimed in the empirical literature. Copyright 1990 by American Finance Association.

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  • Longstaff, Francis A, 1990. " Time Varying Term Premia and Traditional Hypotheses about the Term Structure," Journal of Finance, American Finance Association, vol. 45(4), pages 1307-1314, September.
  • Handle: RePEc:bla:jfinan:v:45:y:1990:i:4:p:1307-14
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    1. repec:eee:jbfina:v:83:y:2017:i:c:p:135-152 is not listed on IDEAS
    2. V. Vance Roley & Gordon H. Sellon, 1995. "Monetary policy actions and long-term interest rates," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 73-89.
    3. Yougsoo Choi & Tony S. Wirjanto, 2008. "A Simple Model of the Nominal Term Structure of Interest Rates," Working Papers 08011, University of Waterloo, Department of Economics.
    4. McAndrews, James & Sarkar, Asani & Wang, Zhenyu, 2017. "The effect of the term auction facility on the London interbank offered rate," Journal of Banking & Finance, Elsevier, vol. 83(C), pages 135-152.
    5. María O González & Frank Skinner & Samuel Agyei-Ampomah, 2013. "Term structure information and bond strategies," Review of Quantitative Finance and Accounting, Springer, vol. 41(1), pages 53-74, July.
    6. Franco Parisi, 1998. "Tasas de Interés Nominal de Corto Plazo en Chile: Una Comparación Empírica de sus Modelos," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 35(105), pages 161-182.
    7. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    8. A. Mansur & M. Masih & Vicky Ryan, 2005. "The term structure of interest rates in Australia: an application of long run structural modelling," Applied Financial Economics, Taylor & Francis Journals, vol. 15(8), pages 557-573.
    9. Choi, Youngsoo & Wirjanto, Tony S., 2007. "An analytic approximation formula for pricing zero-coupon bonds," Finance Research Letters, Elsevier, vol. 4(2), pages 116-126, June.

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