Expectations Hypothesis Revisited

Abstract

In this paper we study the three academically prevalent versions of the Log form of the Expectations Hypothesis (LEH) for the long-term zero-coupon treasury bond yields using the level variables and find clear affirmation for one version, general affirmation for the second version and clear negation for the third version. These results validate the LEH theory while explaining the reasons behind the widespread negative empirical evidence reported in the past. We also develop two more models for estimating and forecasting the bond yields using a simple average index of the yields for different maturities.

Keywords: Zero coupon bonds; Bond yields; Expectation Hypothesis; Estimation; Forecasting.

JEL Classification: E4