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'Peso Problem' Explanations for Term Structure Anomalies

Posted: 10 Aug 1998  

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

Multiple version iconThere are 2 versions of this paper

Date Written: March 1999

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

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: https://ssrn.com/abstract=100318

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)

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Cambridge, MA 02138
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Robert J. Hodrick

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

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New York, NY 10016-4309
United States

David Aaron Marshall

Federal Reserve Bank of Chicago ( email )

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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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