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Testing the Expectations Theory of the Term Structure of Interest Rates Using Model-Selection Methods

Author

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  • Chao John C.

    (University of Maryland)

  • Chiao Chaoshin

    (Institute of International Economics National Dong Hwa University)

Abstract

In this paper, we propose a model-selection approach to testing the expectations theory of the term structure of interest rates. Our method is based on the posterior information criterion (PIC) developed and analyzed by Phillips and Ploberger (1994, 1996) and extended to provide order estimation of cointegrating rank by Chao and Phillips (1997). This methodology has the advantage that issues of order selection-i.e., the determination of lag length and cointegrating rank in a vector autoregression-and hypothesis testing are treated within the same framework. Applying our procedure to interest-rate data from the International Financial Statistics, we find the expectations theory to be inconsistent with the data.

Suggested Citation

  • Chao John C. & Chiao Chaoshin, 1998. "Testing the Expectations Theory of the Term Structure of Interest Rates Using Model-Selection Methods," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 2(4), pages 1-16, January.
    • Handle: RePEc:bpj:sndecm:v:2:y:1998:i:4:n:1
    DOI: 10.2202/1558-3708.1032
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    Cited by:

    1. Chew Lian Chua & Chin Nam Low, 2007. "Permanent Structural Change in the US Short-Term and Long-Term Interest Rates," Melbourne Institute Working Paper Series wp2007n22, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    2. Par Sjolander, 2010. "A stationary unbiased finite sample ARCH-LM test procedure," Applied Economics, Taylor & Francis Journals, vol. 43(8), pages 1019-1033.

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