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The Yield Curve and the Interest Rates Expectations on Fixed Income Market in Colombia Between 2002 and 2007

Author

Listed:
  • Diego Agudelo Rueda

    (Departamento de Finanzas, Universidad EAFIT)

  • Mónica Arango Arango

    (Programa de Ingeniería Financiera, Universidad de Medellín)

Abstract

How does the yield curve incorporate expectations on the Colombian future short-term interest rates? Two theories have been proposed to explain it: the Expectation Hypothesis and the Liquidity Preference Hypothesis. This paper tests both theories for the TES yield curve as well as for the CDT yield curve, using time-series models that account for the persistence and heteroskedasticity of interest rates. The results support the Liquidity Preference Hypothesis, consistent with the fact that in Colombia long-term rates have been consistently higher than short-term rates. However we found evidence of some predictive power of the long-term rates on the future short term rates, consistent with the Expectation Hypothesis.

Suggested Citation

  • Diego Agudelo Rueda & Mónica Arango Arango, 2008. "The Yield Curve and the Interest Rates Expectations on Fixed Income Market in Colombia Between 2002 and 2007," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 68, pages 39-66, Enero-Jun.
    • Handle: RePEc:lde:journl:y:2008:i:68:p:39-66
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    File URL: https://revistas.udea.edu.co/index.php/lecturasdeeconomia/issue/view/40
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    More about this item

    Keywords

    expectations hypothesis; liquidity preference theory; term structure of interest rates; capital markets; fixed income;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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