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The expectation hypothesis of the term structure of very short-term rates : Statistical tests and economic value
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Della Corte, Pasquale, Sarno, Lucio and Thornton, Daniel L. (2008) The expectation hypothesis of the term structure of very short-term rates : Statistical tests and economic value. In: 62nd European Meeting of the Econometric-Society, Budapest, Hungary, Aug 27-31, 2007. Published in: Journal of Financial Economics, Volume 89 (Number 1). pp. 158-174. doi:10.1016/j.jfineco.2007.08.002 ISSN 0304-405X.
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Official URL: http://dx.doi.org/10.1016/j.jfineco.2007.08.002
Abstract
This paper reexamines the validity of the expectation hypothesis (EH) of the term structure of US repo rates ranging in maturity from overnight to 3 months. We extend the work of Longstaff [2000b. The term Structure of very short term rates: new evidence for the expectations hypothesis. journal of Financial Economics 58, 397-415] in two directions: (1) we implement statistical tests designed to increase test power in this context; (2) more important, 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. (C) 2008 Elsevier B.V. All rights reserved.
| Item Type: | Conference Item (UNSPECIFIED) | ||||
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| Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HG Finance |
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| Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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| Library of Congress Subject Headings (LCSH): | Rational expectations (Economic theory), Economic value added, Interest rates, Vector analysis, Regression analysis | ||||
| Journal or Publication Title: | Journal of Financial Economics | ||||
| Publisher: | Elsevier Science BV | ||||
| ISSN: | 0304-405X | ||||
| Official Date: | July 2008 | ||||
| Dates: |
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| Volume: | Volume 89 | ||||
| Number: | Number 1 | ||||
| Number of Pages: | 17 | ||||
| Page Range: | pp. 158-174 | ||||
| DOI: | 10.1016/j.jfineco.2007.08.002 | ||||
| Status: | Peer Reviewed | ||||
| Publication Status: | Published | ||||
| Access rights to Published version: | Restricted or Subscription Access | ||||
| Version or Related Resource: | Della Corte, P., Sarno, L and Thornton, D.L. (2007). The expectation hypothesis of the term structure of very short-term rates: statistical tests and economic value. London : Centre for Economic Policy Research. (Discussion paper (Centre for Economic Policy Research (Great Britain)), no.6445). http://wrap.warwick.ac.uk/id/eprint/1714 | ||||
| Title of Event: | 62nd European Meeting of the Econometric-Society | ||||
| Type of Event: | Conference | ||||
| Location of Event: | Budapest, Hungary | ||||
| Date(s) of Event: | Aug 27-31, 2007 | ||||
| Related URLs: |
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