Behavioral Biases and the Expectations Hypothesis of the Term Structure of Interest Rates

University of Exeter Business School Working Paper No. 11/06

31 Pages Posted: 17 Nov 2011 Last revised: 4 Sep 2013

See all articles by Richard D. F. Harris

Richard D. F. Harris

University of Bristol

George Bulkley

University of Bristol

Vivekanand Nawosah

University of Essex

Date Written: April 17, 2013

Abstract

We report that excess returns in the bond market exhibit the same features of short-term momentum and long-term reversals that are observed in the equity market. We test whether these findings can be accounted for within a behavioral framework using the expectations of the short yield that are implicit in the term structure of interest rates. By decomposing the excess return into components related to expectation errors and expectation revisions, and extracting these from the term structure of interest rates, we show that momentum and reversals in the bond market can be explained by the well-established representativeness and conservatism biases.

Keywords: Behavioral bias, Expectations hypothesis of the term structure of interest rates, Representativeness, Law of small numbers, Conservatism

Suggested Citation

Harris, Richard D. F. and Bulkley, George and Nawosah, Vivekanand, Behavioral Biases and the Expectations Hypothesis of the Term Structure of Interest Rates (April 17, 2013). University of Exeter Business School Working Paper No. 11/06, Available at SSRN: https://ssrn.com/abstract=1961121 or http://dx.doi.org/10.2139/ssrn.1961121

Richard D. F. Harris (Contact Author)

University of Bristol ( email )

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

George Bulkley

University of Bristol ( email )

United Kingdom

Vivekanand Nawosah

University of Essex ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

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