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Further analysis of the expectations hypothesis using very short-term rates

  • Brown, Craig R.
  • Cyree, Ken B.
  • Griffiths, Mark D.
  • Winters, Drew B.
Registered author(s):

    Longstaff [Longstaff, F., 2000. The term structure of very short-term rates: new evidence for the expectations hypothesis. Journal of Financial Economics 58, 397-415] finds support for the expectations hypothesis at the very short end of the repurchase agreement (repo) term structure while other studies find calendar-time-based regularities cause rejection of the expectations hypothesis. Using Longstaff's methods on a sample of repo rates that pre-dates Longstaff's sample, we reject the expectations hypothesis for every maturity. The pre-Longstaff-sample repo data comes from a time period where the behavior of short-term interest rates is similar to the long-run average behavior of short-term interest rates. Our results imply that expectations hold when rates are less volatile and/or that we may be entering a period of lower volatility.

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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 32 (2008)
    Issue (Month): 4 (April)
    Pages: 600-613

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    Handle: RePEc:eee:jbfina:v:32:y:2008:i:4:p:600-613
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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    1. Longstaff, Francis A., 2000. "The term structure of very short-term rates: New evidence for the expectations hypothesis," Journal of Financial Economics, Elsevier, vol. 58(3), pages 397-415, December.
    2. Lange, Joe & Sack, Brian & Whitesell, William, 2003. " Anticipations of Monetary Policy in Financial Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 889-909, December.
    3. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
    4. Downing, Chris & Oliner, Stephen, 2007. "The term structure of commercial paper rates," Journal of Financial Economics, Elsevier, vol. 83(1), pages 59-86, January.
    5. Geert Bekaert & Robert J. Hodrick & David Marshall, 1996. "On biases in tests of the expectations hypothesis of the term structure of interest rates," Working Paper Series, Issues in Financial Regulation WP-96-3, Federal Reserve Bank of Chicago.
    6. 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 703-08, May.
    7. Cyree, Ken B & Winters, Drew B, 2001. "Analysis of Federal Funds Rate Changes and Variance Patterns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 24(3), pages 403-18, Fall.
    8. Christiansen, Charlotte, 2003. "Multivariate Term Structure Models with Level and Heteroskedasticity Effects," Finance Working Papers 02-19, University of Aarhus, Aarhus School of Business, Department of Business Studies.
    9. Cavanagh, Christopher L. & Elliott, Graham & Stock, James H., 1995. "Inference in Models with Nearly Integrated Regressors," Econometric Theory, Cambridge University Press, vol. 11(05), pages 1131-1147, October.
    10. Mark D. Griffiths & Drew B. Winters, 1997. "The Effect of Federal Reserve Accounting Rules on the Equilibrium Level of Overnight Repo Rates," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(6), pages 815-832.
    11. Mark Griffiths & Drew Winters, 1997. "On a Preferred Habitat for Liquidity at the Turn-of-the-Year: Evidence from the Term-Repo Market," Journal of Financial Services Research, Springer, vol. 12(1), pages 21-38, August.
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