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The information content of the term structure of interest rates

  • Petko Kalev
  • Brett Inder

This paper presents the results of an alternative test of the rational expectations theory of the term structure of interest rates. Other researchers have also examined the validity of the expectations hypothesis of term structure. While there is more often rejection of the expectations hypothesis, no other theory (data-consistent with the entire yield curve) provides an empirically adequate explanation of this phenomenon. The study considers postwar US pure discount (zero coupons) bond yields with various maturities, from one month to 60 months. Based on the ex post formation of rational expectations, the expectations error is quantified and the level of truth of the expectations hypothesis tested, that is, the strength of the departure of the yield curve from the expectations theory. The results suggest that a significant amount of information available at no cost to market agents is not incorporated in forming people's expectations.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/00036840500365967
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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 38 (2006)
Issue (Month): 1 ()
Pages: 33-45

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Handle: RePEc:taf:applec:v:38:y:2006:i:1:p:33-45
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  1. Hardouvelis, Gikas A., 1994. "The term structure spread and future changes in long and short rates in the G7 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 255-283, April.
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  3. Hayashi, Fumio & Sims, Christopher A, 1983. "Nearly Efficient Estimation of Time Series Models with Predetermined, but Not Exogenous, Instruments," Econometrica, Econometric Society, vol. 51(3), pages 783-98, May.
  4. Gerlach, Stefan & Smets, Frank, 1997. "The term structure of Euro-rates: some evidence in support of the expectations hypothesis," Journal of International Money and Finance, Elsevier, vol. 16(2), pages 305-321, April.
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  7. Heather Anderson, 1999. "Explanations of an empirical puzzle: what can be learnt from a test of the rational expectations hypothesis?," Journal of Economic Methodology, Taylor & Francis Journals, vol. 6(1), pages 31-59.
  8. Engsted, Tom & Tanggaard, Carsten, 1995. " The Predictive Power of Yield Spreads for Future Interest Rates: Evidence from the Danish Term Structure," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(1), pages 145-59, March.
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  11. Roberds, William & Whiteman, Charles H., 1999. "Endogenous term premia and anomalies in the term structure of interest rates: Explaining the predictability smile," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 555-580, December.
  12. Campbell, John Y & Shiller, Robert J, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 495-514, May.
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  15. Bekaert, Geert & Hodrick, Robert J. & Marshall, David A., 1997. "On biases in tests of the expectations hypothesis of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 44(3), pages 309-348, June.
  16. Engsted, Tom, 1996. "The predictive power of the money market term structure," International Journal of Forecasting, Elsevier, vol. 12(2), pages 289-295, June.
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