The Term Structure of Interest Rates across Frequencies
36 Pages Posted: 23 Dec 2008
Date Written: December 3, 2008
This paper tests the expectations hypothesis (EH) of the term structure of interest rates in US data, using spectral regression techniques that allow us to consider different frequency bands. We find a positive relation between the term spread and the change in the long-term interest rate in a frequency band of 6 months to 4 years, whereas the relation is negative at higher and lower frequencies. We confirm that the variance of term premia relative to expected changes in long-term interest rates dominates at high and low frequencies, leading the EH to be rejected in those bands but not in the intermediate frequency band.
Keywords: Expectations theory of the term structure, interest rates, spectral regression, frequency domain
JEL Classification: C22, E43
Suggested Citation: Suggested Citation