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Testing the Expectations Hypothesis: Some New Evidence for Japan

  • Thornton, Daniel-L

    (Federal Reserve Bank of St Louis)

The deregulation of the Japanese financial markets and the adoption of an interest rate policy instrument by the Bank of Japan prompted a number of empirical investigations of the expectations hypothesis (EH) of the term-structures of interest rates in Japan. This paper is a continuation of this research. It deviates from the previous work on the EH in Japan in two respects. First, it tests the EH by estimating a general vector autoregression (VAR) of the long-term and short-term rates and testing the restrictions implied by the EH on the VAR using a Lagrange multiplier (LM) test. Second, the issue of stationarity of interest rates is considered. The paper not only considers the possibility that Japanese interest rates are nonstationary, but also analyzes the implications of nonstationarity for the EH.

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Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 22 (2004)
Issue (Month): 2 (May)
Pages: 45-69

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Handle: RePEc:ime:imemes:v:22:y:2004:i:2:p:45-69
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  1. Carriero, Andrea & Favero, Carlo A. & Kaminska, Iryna, 2004. "Financial Factors, Macroeconomic Information and the Expectations Theory of the Term Structure of Interest Rates," CEPR Discussion Papers 4301, C.E.P.R. Discussion Papers.
  2. Geert Bekaert, 2001. "Expectations Hypotheses Tests," Journal of Finance, American Finance Association, vol. 56(4), pages 1357-1394, 08.
  3. Daniel L. Thornton, 2003. "Monetary policy transparency: transparent about what?," Manchester School, University of Manchester, vol. 71(5), pages 478-497, 09.
  4. John Y. Campbell & Robert J. Shiller, 1989. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," NBER Working Papers 3153, National Bureau of Economic Research, Inc.
  5. Geert Bekaert & Robert J. Hodrick & David A. Marshall, 1997. ""Peso problem" explanations for term structure anomalies," Working Paper Series, Issues in Financial Regulation WP-97-07, Federal Reserve Bank of Chicago.
  6. Daniel L. Thornton, 2004. "Tests of the expectations hypothesis: resolving the Campbell-Shiller paradox," Working Papers 2003-022, Federal Reserve Bank of St. Louis.
  7. Kool, Clemens J. M. & Thornton, Daniel L., 2004. "A note on the expectations hypothesis at the founding of the Fed," Journal of Banking & Finance, Elsevier, vol. 28(12), pages 3055-3068, December.
  8. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-88, October.
  9. David A. Dickey & Dennis W. Jansen & Daniel L. Thornton, 1991. "A primer on cointegration with an application to money and income," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 58-78.
  10. Takagi, Shinji, 1988. "Recent developments in Japan's bond and money markets," Journal of the Japanese and International Economies, Elsevier, vol. 2(1), pages 63-91, March.
  11. William Poole & Robert H & Rasche & Daniel L. Thornton, 2002. "Market anticipations of monetary policy actions," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 65-94.
  12. Engsted, Tom & Tanggaard, Carsten, 1994. "Cointegration and the US term structure," Journal of Banking & Finance, Elsevier, vol. 18(1), pages 167-181, January.
  13. Glenn D. Rudebusch, 2001. "Term structure evidence on interest rate smoothing and monetary policy inertia," Working Paper Series 2001-02, Federal Reserve Bank of San Francisco.
  14. Sarno, Lucio & Thornton, Daniel L., 2003. "The dynamic relationship between the federal funds rate and the Treasury bill rate: An empirical investigation," Journal of Banking & Finance, Elsevier, vol. 27(6), pages 1079-1110, June.
  15. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-26, February.
  16. Okina, Kunio & Shiratsuka, Shigenori, 2004. "Policy commitment and expectation formation: Japan's experience under zero interest rates," The North American Journal of Economics and Finance, Elsevier, vol. 15(1), pages 75-100, March.
  17. Pierluigi Balduzzi & Giuseppe Bertola & Silverio Foresi, 1993. "A Model of Target Changes and the Term Structure of Interest Rates," NBER Working Papers 4347, National Bureau of Economic Research, Inc.
  18. John Y. Campbell & Yasushi Hamao, 1993. "The Interest Rate Process and the Term Structure of Interest Rates in Japan," NBER Chapters, in: Japanese Monetary Policy, pages 95-120 National Bureau of Economic Research, Inc.
  19. Daniel L. Thornton, 1985. "Money demand dynamics: some new evidence," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 14-23.
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