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Time-Varying Risk Premia in the Single European Treasury Bill Market


  • Nikolaos Mylonidis


This paper investigates the validity of the expectations hypothesis (EH) with time-varying, albeit stationary, term premia in the Ecu Treasury bill market. The analysis utilises the term premium factor representation proposed by Tzavalis and Wickens (1997) and the modified VAR approach by Cuthbertson et al. (1997). The findings indicate that once time-varying term premia are accounted for, estimated models cannot reject the predictions of the EH. However, these term premia do not exhibit strong persistence. The rejection of the spread restriction for (n,m)=(26-week,13-week) may be due to a small I(1) term premium and/or a slight misalignment of investment horizons.

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  • Nikolaos Mylonidis, 2006. "Time-Varying Risk Premia in the Single European Treasury Bill Market," European Research Studies Journal, European Research Studies Journal, vol. 0(1-2), pages 65-84.
  • Handle: RePEc:ers:journl:v:ix:y:2006:i:1-2:p:65-84

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    References listed on IDEAS

    1. Campbell, John Y., 1987. "Stock returns and the term structure," Journal of Financial Economics, Elsevier, vol. 18(2), pages 373-399, June.
    2. Fama, Eugene F., 1976. "Forward rates as predictors of future spot rates," Journal of Financial Economics, Elsevier, vol. 3(4), pages 361-377, October.
    3. Simon, David P., 1989. "Expectations and Risk in the Treasury Bill Market: An Instrumental Variables Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(03), pages 357-365, September.
    4. John Y. Campbell & Robert J. Shiller, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Oxford University Press, vol. 58(3), pages 495-514.
    5. Tzavalis, Elias & Wickens, Michael R, 1997. "Explaining the Failures of the Term Spread Models of the Rational Expectations Hypothesis of the Term Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 364-380, August.
    6. Mishkin, Frederic S, 1982. " Monetary Policy and Short-Term Interest Rates: An Efficient Markets-Rational Expectations Approach," Journal of Finance, American Finance Association, vol. 37(1), pages 63-72, March.
    7. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
    8. Jones, David S. & Vance Roley, V., 1983. "Rational expectations and the expectations model of the term structure : A test using weekly data," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 453-465, September.
    9. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
    10. Michael Bowe & Nikolaos Mylonidis, 1999. "Is the European Capital Market Ready for the Single Currency?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(1-2), pages 1-32.
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    More about this item


    Expectations hypothesis; Risk Premia; Perfect foresight regressions; VAR;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects


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