The Expectations Hypothesis of the Term Structure of Bond Yields: Results from the VAR Test

34 Pages Posted: 1 Mar 2005

See all articles by Robert Dittmar

Robert Dittmar

Citigroup, Inc. - CitiMortgage

Daniel L. Thornton

Federal Reserve Bank of St. Louis - Research Division

Date Written: Febrary 2005

Abstract

This paper tests the expectations hypothesis (EH) with the data used in Campbell and Shiller's (1991) seminal work on the EH using a Lagrange multiplier test developed recently by Bekaert and Hodrick (2001). This test is applied under the assumption that interest rates are integrated of order one, I(1), as in Campbell and Shiller (1987), and under the assumption that interest rates are stationary. We also extend the literature beyond the bivariate comparisons of long-term and short-term rates which dominates the EH testing literature. Consistent with the findings of Campbell and Shiller (1991), the EH is rejected at the short end of the maturity spectrum but not at the longer end. However, the EH is rejected at the longer end of the term structure when more than two rates are considered. We also find that the frequently used practice of calculating the ratio of the variance of the forecasted long-term rate (or rate spread) under the EH to the observed variance is not useful for assessing the validity of the EH.

Keywords: Expectations hypothesis, LaGrange multiplier test, vector autoregression

JEL Classification: G1, E4, E10

Suggested Citation

Dittmar, Robert D. and Thornton, Daniel L., The Expectations Hypothesis of the Term Structure of Bond Yields: Results from the VAR Test (Febrary 2005). Available at SSRN: https://ssrn.com/abstract=675848 or http://dx.doi.org/10.2139/ssrn.675848

Robert D. Dittmar

Citigroup, Inc. - CitiMortgage ( email )

St. Louis, MO
United States

Daniel L. Thornton (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-8582 (Phone)
314-444-8731 (Fax)

HOME PAGE: http://research.stlouisfed.org/econ/thornton/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
70
Abstract Views
1,372
rank
403,696
PlumX Metrics