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
Date Written: April 17, 2013
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
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