Around and Around: The Expectations Hypothesis
We show how to construct models of the term structure of interest rates in which the expectations hypothesis holds. McCulloch (1993) presents such a model, thereby contradicting an assertion by Cox, Ingersoll, and Ross (1981), but his example is Gaussian and falls outside the class of finite-dimensional Markovian models. We generalize McCulloch's model in three ways: (i) We provide an arbitrage-free characterization of the unbiased expectations hypothesis in terms of forward rates; (ii) we extend this characterization to a whole class of expectations hypotheses; and (iii) we show how to construct finite-dimensional Markovian and non-Gaussian examples. Copyright The American Finance Association 1998.
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Volume (Year): 53 (1998)
Issue (Month): 1 (02)
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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.:
- John Y. Campbell & Robert J. Shiller, 1991.
"Yield Spreads and Interest Rate Movements: A Bird's Eye View,"
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Oxford University Press, vol. 58(3), pages 495-514.
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" A Defense of Traditional Hypotheses about the Term Structure of Interest Rates,"
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American Finance Association, vol. 41(1), pages 183-93, March.
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- Campbell, John, 1986. "A Defense of Traditional Hypotheses about the Term Structure of Interest Rates," Scholarly Articles 3207698, Harvard University Department of Economics.
- Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1981. "A Re-examination of Traditional Hypotheses about the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 36(4), pages 769-99, September.
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