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Time-varying term premia and the expectations hypothesis in Australia

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  • Richard Finlay
  • Callum Jones

Abstract

This article investigates whether the (rational) expectations hypothesis holds for Australian yield data (it does not), whether the hypothesis holds after adjusting for term premia estimated from an affine term structure model (it appears to) and whether the yield process implied by the term structure model can match the failure of the hypothesis on unadjusted yields (it can). These results suggest that the term structure model used in Finlay and Chambers (2009) does a reasonable job in capturing the risk-neutral and real-world dynamics of Australian interest rates, at least as measured through the prism of the expectations hypothesis.

Suggested Citation

  • Richard Finlay & Callum Jones, 2011. "Time-varying term premia and the expectations hypothesis in Australia," Applied Economics Letters, Taylor & Francis Journals, vol. 18(2), pages 133-136.
    • Handle: RePEc:taf:apeclt:v:18:y:2011:i:2:p:133-136
    DOI: 10.1080/13504850903508259
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    References listed on IDEAS

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    1. Richard Finlay & Mark Chambers, 2009. "A Term Structure Decomposition of the Australian Yield Curve," The Economic Record, The Economic Society of Australia, vol. 85(271), pages 383-400, December.
    2. Unknown, 2005. "Forward," 2005 Conference: Slovenia in the EU - Challenges for Agriculture, Food Science and Rural Affairs, November 10-11, 2005, Moravske Toplice, Slovenia 183804, Slovenian Association of Agricultural Economists (DAES).
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    Cited by:

    1. Samih Antoine Azar, 2018. "Forward Unbiasedness in the Short End of the Interest Rate Market," International Business Research, Canadian Center of Science and Education, vol. 11(2), pages 70-78, February.
    2. Samih Antoine Azar, 2018. "The Pure Expectations Theory and Quarterly Interest Rate Premiums," Accounting and Finance Research, Sciedu Press, vol. 7(1), pages 161-161, February.
    3. Vijay A. Murik, 2013. "Bond pricing with a surface of zero coupon yields," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 53(2), pages 497-512, June.

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