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Spread overreaction in international bond markets

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  • Gregory D. Sutton

Abstract

This paper applies the Campbell-Shiller (1987) methodology to a study of the joint behaviour of a three-month and a five-year government yield in the United States, Canada, the United Kingdom, Germany and Japan. The period studied is for most countries the mid-1970s to the third quarter of 1997. The empirical results allow the rejection of the expectations theory of the term structure at high levels of statistical significance in every country except Japan. Furthermore, in every country where the expectations theory fails, the failure of the theory is consistent with the spread overreaction hypothesis of Froot (1989) and Campbell and Shiller (1991). This implies that the departures of long rates from levels predicted by the expectations theory in many major markets cannot be attributed to white noise error terms.

Suggested Citation

  • Gregory D. Sutton, 1998. "Spread overreaction in international bond markets," BIS Working Papers 55, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:55
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    References listed on IDEAS

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    1. 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.
    2. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-1088, October.
    3. John Y. Campbell & Robert J. Shiller, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Oxford University Press, vol. 58(3), pages 495-514.
    4. Campbell, John Y & Shiller, Robert J, 1984. "A Simple Account of the Behavior of Long-Term Interest Rates," American Economic Review, American Economic Association, vol. 74(2), pages 44-48, May.
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    Cited by:

    1. Nicolas Rautureau, 2004. "Modèles à changement de régime et test de la théorie des anticipations rationnelles de la structure par terme des taux dintérêt en France," Économie et Prévision, Programme National Persée, vol. 163(2), pages 117-129.
    2. Didier Cossin & Tomas Hricko & Daniel Aunon-Nerin & Zhijiang Huang, 2002. "Exploring for the Determinants of Credit Risk in Credit Default Swap Transaction Data: Is Fixed-Income Markets’ Information Suffcient to Evaluate Credit Risk?," FAME Research Paper Series rp65, International Center for Financial Asset Management and Engineering.

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