Structural Breaks, Parameter Uncertainty and Term Structure Puzzles

41 Pages Posted: 29 Dec 2010 Last revised: 20 May 2019

See all articles by George Bulkley

George Bulkley

University of Bristol

Paolo Giordani

Norwegian Business School

Date Written: October 2, 2010

Abstract

We show that uncertainty about parameters of the short rate model can account for the rejections of the expectations hypothesis for the term structure of interest rates. We assume that agents employ Bayes rule to learn parameter values in the context of a model that is subject to stochastic structural breaks. We show that parameter uncertainty will also imply that the verdict on the expectations hypothesis will vary systematically with the term of the long bond, and the particular test employed, in the same way that is found in empirical tests.

Keywords: Change-Point, Learning, Expectations Hypothesis

JEL Classification: G12, G17

Suggested Citation

Bulkley, George and Giordani, Paolo, Structural Breaks, Parameter Uncertainty and Term Structure Puzzles (October 2, 2010). George Bulkley, and Paolo Giordani “Structural Breaks, Parameter Uncertainty, and Term Structure Puzzles” Journal of Financial Economics, 2011, 102, 222-232., Available at SSRN: https://ssrn.com/abstract=1732156

George Bulkley (Contact Author)

University of Bristol ( email )

United Kingdom

Paolo Giordani

Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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