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Explanations of an empirical puzzle: what can be learnt from a test of the rational expectations hypothesis?

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  • Heather Anderson

Abstract

This paper illustrates the interplay between theory development and data analysis by considering the ability of the rational expectations hypothesis to explain the empirical cointegration structure found in the term structure. It finds that although a standard no-arbitrage theory that incorporates rational expectations can explain some of the properties of Treasury Bill yields, this theoretical explanation is incomplete. A broader-based explanation that accounts for government debt and time-varying risk premia can improve predictions of yield movements, relative to those predictions based solely on a bill yield spread.

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  • 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.
  • Handle: RePEc:taf:jecmet:v:6:y:1999:i:1:p:31-59 DOI: 10.1080/13501789900000002
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    References listed on IDEAS

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    Cited by:

    1. Petko Kalev & Brett Inder, 2006. "The information content of the term structure of interest rates," Applied Economics, Taylor & Francis Journals, vol. 38(1), pages 33-45.

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