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"Peso Problem" Explanations for Term Structure Anomalies

  • Geert Bekaert
  • Robert J. Hodrick
  • David A. Marshall

We examine the empirical evidence on the expectations hypothesis of the term structure of interest rates in the United States, the United Kingdom, and Germany using the Campbell-Shiller (1991) regressions and a vector-autoregressive" methodology. We argue that anomalies in the U.S. term structure, documented by Campbell and Shiller (1991), may be due to a generalized peso problem in which a high-interest rate regime occurred less frequently in the sample of U.S. data than was rationally anticipated. We formalize this idea as a regime-switching model of short-term interest rates estimated with data" from seven countries. Technically, this model extends recent research on regime-switching models with state-dependent transitions to a cross-sectional setting. Use of the small sample distributions generated by the regime-switching model for inference considerably weakens the evidence against the expectations hypothesis, but it remains somewhat implausible that our data-generating process produced the U.S. data. However, a model that combines moderate time-variation in term premiums with peso-problem effects is largely consistent with term structure data from the U.S., U.K., and Germany.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6147.

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Date of creation: Aug 1997
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Publication status: published as Bekaert, Geert, Robert J. Hodrick and David A. Marshall. "Peso Problem Explanations For Term Structure Anomalies," Journal of Monetary Economics, 2001, v48(2,Oct), 241-270.
Handle: RePEc:nbr:nberwo:6147
Note: AP
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  1. Martin D.D. Evans, 1995. "Peso Problems: Their Theoretical and Empirical Implications," Working Papers 95-05, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Glenn D. Rudebusch, 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Working Papers in Applied Economic Theory 95-02, Federal Reserve Bank of San Francisco.
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