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New Evidence Concerning the Expectations Theory for the Short End of the Maturity Spectrum

Listed author(s):
  • Choi, Seungmook
  • Wohar, Mark E

This paper reexamines the evidence rejecting the expectations theory of the term structure. Weakly, monthly, and quarterly data on three- and six-month interest rates are employed for five subperiods--1910-1914, 1919-1933, 1934-59, 1959-78, and 1979-89. Econometric techniques are used to correct standard errors for overlapping data and for heteroscedasticity. Findings indicate that the weekly and monthly data are consistent with a weak form of the expectations hypothesis in which the yield curve has substantial predictive were for short rates for each subperiod except 1934-59 and 1979-89. Results for the period before the founding of the Federal Reserve indicate that a strong version of the expectations hypothesis cannot be rejected in which the joint hypothesis of rational expectations and expectations theory is hypothesized. The use of cointegration tests and an error-correction model framework to determine whether short and long rates have a common stochastic trend indicates that long and short rates are cointegrated.

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Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

Volume (Year): 14 (1991)
Issue (Month): 1 (Spring)
Pages: 83-92

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Handle: RePEc:bla:jfnres:v:14:y:1991:i:1:p:83-92
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