Abstract

http://ssrn.com/abstract=100318
 
 

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'Peso Problem' Explanations for Term Structure Anomalies


Geert Bekaert


Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Robert J. Hodrick


Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

David A. Marshall


Federal Reserve Bank of Chicago; University of Chicago - Booth School of Business

March 1999

Research Paper No. 1445
FRB Chicago Working Paper No. 1997-07

Abstract:     
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.

JEL Classification: G12, E43

working papers series





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Date posted: August 10, 1998  

Suggested Citation

Bekaert, Geert and Hodrick, Robert J. and Marshall, David A., 'Peso Problem' Explanations for Term Structure Anomalies (March 1999). Research Paper No. 1445; FRB Chicago Working Paper No. 1997-07. Available at SSRN: http://ssrn.com/abstract=100318

Contact Information

Geert Bekaert (Contact Author)
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Robert J. Hodrick
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)
365 Fifth Avenue, 5th Floor
New York, NY 10016-4309
United States
David Aaron Marshall
Federal Reserve Bank of Chicago ( email )
230 South LaSalle Street
Chicago, IL 60604-1413
United States
312-322-5111 (Phone)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
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