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Testing the expectations hypothesis when interest rates are near integrated

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Abstract

Nominal interest rates are unlikely to be generated by unit-root processes. Using data on short and long interest rates from eight developed and six emerging economies, we test the expectations hypothesis using cointegration methods under the assumption that interest rates are near integrated. If the null hypothesis of no cointegration is rejected, we then test whether the estimated cointegrating vector is consistent with that suggested by the expectations hypothesis. The results show support for cointegration in ten of the fourteen countries we consider, and the cointegrating vector is similar across countries. However, the parameters differ from those suggested by theory. We relate our findings to existing literature on the failure of the expectations hypothesis and to the role of term premia.

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  • Meredith J. Beechey & Erik Hjalmarsson & Pär Österholm, 2008. "Testing the expectations hypothesis when interest rates are near integrated," International Finance Discussion Papers 953, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:953
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    1. Stelios Bekiros & Christos Avdoulas, 2020. "Revisiting the Dynamic Linkages of Treasury Bond Yields for the BRICS: A Forecasting Analysis," Forecasting, MDPI, vol. 2(2), pages 1-28, May.
    2. David Knezevic & Martin Nordström & Pär Österholm, 2021. "The relation between municipal and government bond yields in an era of unconventional monetary policy," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 50(1), February.
    3. Hernandis, Lucía & Torró, Hipòlit, 2013. "The information content of Eonia swap rates before and during the financial crisis," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5316-5328.
    4. Hjalmarsson, Erik & Österholm, Pär, 2017. "Households’ Mortgage-Rate Expectations: More Realistic than at First Glance?," Working Papers 2017:9, Örebro University, School of Business.
    5. Kumar Narayan, Paresh & Narayan, Seema & Popp, Stephan, 2010. "Energy consumption at the state level: The unit root null hypothesis from Australia," Applied Energy, Elsevier, vol. 87(6), pages 1953-1962, June.
    6. Kladívko, Kamil & Österholm, Pär, 2021. "Do market participants’ forecasts of financial variables outperform the random-walk benchmark?," Finance Research Letters, Elsevier, vol. 40(C).
    7. Liu, Zhuoshi & Spencer, Peter, 2013. "Modelling sovereign credit spreads with international macro-factors: The case of Brazil 1998–2009," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 241-256.
    8. Anne Lundgaard Hansen, 2018. "Volatility-Induced Stationarity and Error-Correction in Macro-Finance Term Structure Modeling," Discussion Papers 18-12, University of Copenhagen. Department of Economics.
    9. Kessler, Stephan & Scherer, Bernd, 2009. "Varying risk premia in international bond markets," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1361-1375, August.
    10. Spencer, Peter & Liu, Zhuoshi, 2010. "An open-economy macro-finance model of international interdependence: The OECD, US and the UK," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 667-680, March.
    11. Jack R. Rogers, 2013. "Monetary Transmission to UK Retail Mortgage Rates before and after August 2007," Discussion Papers 1307, University of Exeter, Department of Economics.
    12. Fricke, Christoph & Menkhoff, Lukas, 2011. "Does the "Bund" dominate price discovery in Euro bond futures? Examining information shares," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1057-1072, May.
    13. Harrathi Nizar & Alhoshan Hamed M., 2020. "Validity of the Expectations Hypothesis of the Term Structure of Interest Rates: The Case of Saudi Arabia," Review of Middle East Economics and Finance, De Gruyter, vol. 16(1), pages 1-18, April.
    14. Nautz, Dieter & Schmidt, Sandra, 2009. "Monetary policy implementation and the federal funds rate," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1274-1284, July.
    15. Bulkley, George & Harris, Richard D.F. & Nawosah, Vivekanand, 2011. "Revisiting the expectations hypothesis of the term structure of interest rates," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1202-1212, May.
    16. O. Petryk, I. Deysan, 2017. "The heterogeneous impact of monetary levers on the indicators of lending and economic activity," Economy and Forecasting, Valeriy Heyets, issue 2, pages 129-152.
    17. João F. Caldeira, 2020. "Investigating the expectation hypothesis and the risk premium dynamics: new evidence for Brazil," Empirical Economics, Springer, vol. 59(1), pages 395-412, July.
    18. Liu, Ming-Hua & Margaritis, Dimitris & Tourani-Rad, Alireza, 2011. "Asymmetric information and price competition in small business lending," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2189-2196, September.
    19. Jardet, Caroline & Monfort, Alain & Pegoraro, Fulvio, 2013. "No-arbitrage Near-Cointegrated VAR(p) term structure models, term premia and GDP growth," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 389-402.
    20. Paul Francois Muzindutsi & Sinethemba Mposelwa, 2016. "Testing the Expectations Hypothesis of the Term Structure of Interest Rates in Brics Countries: A Multivariate Co-integration Approach," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 12(4), pages 289-304, October.

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