The Empirical Failure of the Expectations Hypothesis of the Term Structure of Bond Yields

34 Pages Posted: 2 Nov 2005

See all articles by Lucio Sarno

Lucio Sarno

City University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR)

Daniel L. Thornton

Federal Reserve Bank of St. Louis - Research Division

Giorgio Valente

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR)

Date Written: September 2005

Abstract

This paper tests the expectations hypothesis (EH) using US monthly data for bond yields spanning the 1952-2003 sample period and ranging in maturity from 1 month to 10 years. We apply the Lagrange multiplier test developed by Bekaert and Hodrick (2001) and extend it to increase the test power: (a) by introducing economic variables as conditioning information; and (b) by using more than two bond yields in the model and testing the EH jointly on more than one pair of yields. While the conventional bivariate procedure provides mixed results, the more powerful testing procedures suggest rejection of the EH throughout the maturity spectrum examined.

Keywords: Expectations hypothesis, term structure of interest rates, vector autoregression

JEL Classification: E43, G10

Suggested Citation

Sarno, Lucio and Thornton, Daniel L. and Valente, Giorgio, The Empirical Failure of the Expectations Hypothesis of the Term Structure of Bond Yields (September 2005). CEPR Discussion Paper No. 5259. Available at SSRN: https://ssrn.com/abstract=840809

Lucio Sarno (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Daniel L. Thornton

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/

Giorgio Valente

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR) ( email )

3 Garden Road, 8th Floor
Hong Kong
China

Register to save articles to
your library

Register

Paper statistics

Downloads
29
Abstract Views
811
PlumX Metrics