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Testing the Expectations Hypothesis in the Brazilian Term Structure of Interest Rates

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  • Benjamin Miranda Tabak
  • Sandro Canesso de Andrade

Abstract

In this paper the Expectations Hypothesis (EH) is tested using cointegration techniques, for maturities ranging from 1-month to 12-months, for the Brazilian market. We found evidence suggesting that for the period 1995-2001, the cointegration implication generally seems to hold. We also found strong evidence supporting causality from short to long rates and also in the opposite direction. Empirical evidence supports the expectations theory of the term structure of interest rates. However, when using multivariate cointegration tests we reject the unbiasedness hypothesis implied in the pure EH.

Suggested Citation

  • Benjamin Miranda Tabak & Sandro Canesso de Andrade, 2001. "Testing the Expectations Hypothesis in the Brazilian Term Structure of Interest Rates," Working Papers Series 30, Central Bank of Brazil, Research Department.
  • Handle: RePEc:bcb:wpaper:30
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    File URL: https://www.bcb.gov.br/pec/wps/ingl/wps30.pdf
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    References listed on IDEAS

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    1. Jondeau, Eric & Ricart, Roland, 1999. "The expectations hypothesis of the term structure: tests on US, German, French, and UK Euro-rates," Journal of International Money and Finance, Elsevier, vol. 18(5), pages 725-750, October.
    2. Tzavalis, Elias & Wickens, Michael R, 1997. "Explaining the Failures of the Term Spread Models of the Rational Expectations Hypothesis of the Term Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 364-380, August.
    3. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    4. Hurn, A Stan & Moody, Terry & Muscatelli, V Anton, 1995. "The Term Structure of Interest Rates in the London Interbank Market," Oxford Economic Papers, Oxford University Press, vol. 47(3), pages 419-436, July.
    5. Shea, Gary S, 1992. "Benchmarking the Expectations Hypothesis of the Interest-Rate Term Structure: An Analysis of Cointegration Vectors," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 347-366, July.
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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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