The expectation hypothesis of the term structure of very short-term rates : statistical tests and economic value
Della Corte, Pasquale, Sarno, Lucio and Thornton, Daniel L. (2007) The expectation hypothesis of the term structure of very short-term rates : statistical tests and economic value. Discussion Paper. London: Centre for Economic Policy Research (Great Britain). Discussion paper (Centre for Economic Policy Research (Great Britain)) (Number 644).
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This paper re-examines the validity of the Expectation Hypothesis (EH) of the term structure of US repo rates ranging in maturity from overnight to three months. We extend the work of Longstaff (2000a) in two directions: (i) we implement statistical tests designed to increase test power in this context; (ii) more importantly, we assess the economic value of departures from the EH based on criteria of profitability and economic significance in the context of a simple trading strategy. The EH is rejected throughout the term structure examined on the basis of the statistical tests. However, the results of our economic analysis are favorable to the EH, suggesting that the statistical rejections of the EH in the repo market are economically insignificant.
|Item Type:||Working or Discussion Paper (Discussion Paper)|
|Subjects:||H Social Sciences > HB Economic Theory|
|Divisions:||Faculty of Social Sciences > Warwick Business School|
|Library of Congress Subject Headings (LCSH):||Rational expectations (Economic theory), Economic value added, Interest rates, Vector analysis, Regression analysis|
|Series Name:||Discussion paper (Centre for Economic Policy Research (Great Britain))|
|Publisher:||Centre for Economic Policy Research (Great Britain)|
|Place of Publication:||London|
|Official Date:||September 2007|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|Version or Related Resource:||Della Corte, P., Sarno, L. and Thornton, D.L. (2008). The expectation hypothesis of the term structure of very short-term rates: Statistical tests and economic value. http://wrap.warwick.ac.uk/id/eprint/29506|
Ahn, D.H., Dittmar, R.F., Gallant, A.R., 2002. Quadratic term structure models: theory and evidence. Review of Financial Studies 15, 243-288.
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