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Testing the Expectations Hypothesis of the Term Structure of Interest Rates in the Presence of a Potential Regime Shift

Listed author(s):
  • Markku Lanne

The expectations hypothesis of the term structure of interest rates is tested using monthly Eurodollar deposit rates for maturities 1, 3 and 6 months covering the period 1983: 1996:6.Whereas classical regression-based tests indicate rejection, tests based on a new model allowing for potential but unrealized regime shifts provide support for the expectations hypothesis.The peso problem is modelled by means of a threshold autoregression.The estimation results suggest that potential regime shift had an effect on expectations concerning the longer-term interest rate only for a short while in the early phase of the sample ??ri?d, when interest rates were at their highest. Key words: peso problem, TAR models, term structure of interest rates

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Article provided by University of Manchester in its journal The Manchester School.

Volume (Year): 71 (2003)
Issue (Month): Supplement (09)
Pages: 54-67

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Handle: RePEc:bla:manchs:v:71:y:2003:i:supplement:p:54-67
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  1. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-708, May.
  2. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
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  5. Bekaert, Geert & Hodrick, Robert J. & Marshall, David A., 1997. "On biases in tests of the expectations hypothesis of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 44(3), pages 309-348, June.
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  7. Balduzzi, Pierluigi & Bertola, Giuseppe & Foresi, Silverio, 1997. "A model of target changes and the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 223-249, July.
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  13. Sola, Martin & Driffill, John, 1994. "Testing the term structure of interest rates using a stationary vector autoregression with regime switching," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 601-628.
  14. Bekaert, Geert & Hodrick, Robert J. & Marshall, David A., 2001. "Peso problem explanations for term structure anomalies," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 241-270, October.
  15. Donald W.K. Andrews, 1986. "Power in Econometric Applications," Cowles Foundation Discussion Papers 800, Cowles Foundation for Research in Economics, Yale University.
  16. Francis X. Diebold & Joon-Haeng Lee & Gretchen C. Weinbach, 1993. "Regime switching with time-varying transition probabilities," Working Papers 93-12, Federal Reserve Bank of Philadelphia.
  17. Pierluigi Balduzzi & Giuseppe Bertola & Silverio Foresi & Leora Klapper, 1997. "Interest Rate Targeting and the Dynamics of Short-Term Rates," NBER Working Papers 5944, National Bureau of Economic Research, Inc.
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