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The Expectations Hypothesis of the Term Structure and Time Varying Risk Premia: a Panel Data Approach

Author

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  • Harris, R.

Abstract

The expectations hypothesis of the term structure of interest rates implies that the spread between short and long bond yields should forecast next period's change in the long yield. Regression based tests have systematically rejected the expectations hypothesis, with estimated coefficients far from their hypothesized values. One explanation of this rejection is that regression tests fail to account for time varying risk premia that are correlated with the spread, causing a downward bias in the estimated regression parameters. This paper uses panel data in order to test the expectations hypothesis in the presence of time varying risk premia.

Suggested Citation

  • Harris, R., 1998. "The Expectations Hypothesis of the Term Structure and Time Varying Risk Premia: a Panel Data Approach," Discussion Papers 9811, University of Exeter, Department of Economics.
    • Handle: RePEc:exe:wpaper:9811
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    Cited by:

    1. Christina Nikitopoulos-Sklibosios & Eckhard Platen, 2012. "Alternative Term Structure Models for Reviewing Expectations Puzzles," Research Paper Series 305, Quantitative Finance Research Centre, University of Technology, Sydney.

    More about this item

    Keywords

    INTEREST RATE ; RISK ; ECONOMETRIC MODELS ; MODELS ; ECONOMETRICS;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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