On the Expectations Hypothesis in US Term Structure
We extend the vector autoregression (VAR) based expectations hypothesis (EH) test of term structure, considered in Bekaert & Hodrick (2001), B&H thereafter, using recent developments in bootstrap literature. Modifications include the use of wild bootstrap to allow for conditional heteroskedasticity in the VAR residuals without imposing strict parameterization, while keeping their contemporaneous correlation, endogeneous model selection procedure in the bootstrap replications to reflect true uncertainty and the stationarity correction designed to prevent finite- sample bias adjusted VAR parameters from becoming explosive. Since Lagrange Miltiplier, Wald and Distance Metric test statistics used in this study are all asymptotically pivotal we estimate their finite sample distributions using a computer simulation, rather than relying on the approximation provided by the first order asymptotic theory. When the modified B&H methodology is applied to extensive US zero coupon term structure data ranging from 1 month to 10 years we find less rejections for the theory in a sub-sample of Jan 1982- Dec 2003 than in Jan 1952- Dec 1978, and when it is rejected it occurs at the very short and long ends of the maturity spectrum. It is also relieving to note that this inference seems to be robust to both AIC and SIC model selection methods. In terms of the conclusions made about the validity of the EH of term structure, the main difference between this study and its counterpart of Sarno, Thornton & Valente (2006), which uses the original B&H methodology, is that we reject the theory less often than they do. This is probably as one would expect, since we test the EH theory of term structure only as opposed to Sarno et al (2006) who, in effect, are testing a joint null hypothesis of the conditional homoskedasticity in the residuals and exogenous lag length of the VAR along with the EH.
When requesting a correction, please mention this item's handle: RePEc:sce:scecfa:508. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.