A Behavioral Approach of The Expectations Hypothesis of the Term Structure of Interest Rates

38 Pages Posted: 13 Nov 2019 Last revised: 19 Jan 2020

See all articles by Hans Patrick Bidias Menik

Hans Patrick Bidias Menik

University of Dschang

Prince Hikouatcha

affiliation not provided to SSRN

David Kamdem

University of Douala

Date Written: December 24, 2019

Abstract

The purpose of this study is to analyze the consequences of relaxing agent’s rationality assumption on the term structure of interest rates formation process. We propose a theoretical model by applying some behavioral finance theory to the term structure of interest rate, including the prospect theory, anchoring and overconfidence. The theoretical model proposed was tested on US T-Bill secondary market data. The results show that agents are more preoccupied by interest rate variation direction in their forecasting than it absolute level. Nevertheless, the long rate can be considers as a portfolio of shorts rates but with different weights depending on the behavior of market operators. For US, although the future variation of interest rates is strongly predictable, operators are “anchoring” themselves to the actual level of interest rate, overweighting it value. It also appears that loose aversion as well can explain the shape of the yield curve at a given time.

Keywords: Terms Structure of Interest Rates, Expectation Hypothesis, Prospect Theory, Overconfidence, Anchoring

JEL Classification: E43, G10

Suggested Citation

Bidias Menik, Hans Patrick and Hikouatcha, Prince and Kamdem, David, A Behavioral Approach of The Expectations Hypothesis of the Term Structure of Interest Rates (December 24, 2019). Available at SSRN: https://ssrn.com/abstract=3479954 or http://dx.doi.org/10.2139/ssrn.3479954

Hans Patrick Bidias Menik (Contact Author)

University of Dschang ( email )

Dschang
Cameroon

Prince Hikouatcha

affiliation not provided to SSRN

David Kamdem

University of Douala ( email )

University of Douala
ESSEC Douala
Douala, Littoral
Cameroon

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