Revisiting the Expectations Hypothesis of the Term Structure of Interest Rates

Xfi Centre For Finance & Investment Working Paper No. 08/02

24 Pages Posted: 27 Aug 2008

See all articles by George Bulkley

George Bulkley

University of Bristol

Richard D. F. Harris

University of Bristol

Vivekanand Nawosah

University of Essex

Date Written: May 2008

Abstract

The expectations hypothesis of the term structure has been decisively rejected by a large empirical literature that spans several decades. In this paper, using a newly constructed dataset of synthetic zero coupon bond yields, we show that evidence against the expectations hypothesis became very much weaker following the widespread acceptance of its empirical failure to describe the behavior of interest rates in the early 1990s. Indeed, in the period 1991-2004, the expectations hypothesis cannot be rejected for most bond maturities. These results are consistent with the idea that asset pricing anomalies tend to disappear once they are widely recognized.

Keywords: Expectations hypothesis of the term structure of interest rates, Forward yields, Yield spreads, Campbell and Shiller tests, Vector autoregression

JEL Classification: G10

Suggested Citation

Bulkley, George and Harris, Richard D. F. and Nawosah, Vivekanand, Revisiting the Expectations Hypothesis of the Term Structure of Interest Rates (May 2008). Xfi Centre For Finance & Investment Working Paper No. 08/02 , Available at SSRN: https://ssrn.com/abstract=1259657 or http://dx.doi.org/10.2139/ssrn.1259657

George Bulkley

University of Bristol ( email )

United Kingdom

Richard D. F. Harris (Contact Author)

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

Vivekanand Nawosah

University of Essex ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

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