The empirical failure of the expectations hypothesis of the term structure of bond yields
Sarno, Lucio, Thornton, Daniel L. and Valente, Giorgio. (2009) The empirical failure of the expectations hypothesis of the term structure of bond yields. Journal of Financial and Quantitative Analysis, Vol.47 (No.1). pp. 81-100. ISSN 0022-1090
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Official URL: http://dx.doi.org/10.1017/S0022109000002192
This paper tests the expectations hypothesis (EH) using U.S. monthly data for bond yields spanning the 1952–2003 sample period and ranging in maturity from one month to 10 years. We apply the Lagrange multiplier test developed by Bekaert and Hodrick (2001) and extend it to increase the test power by introducing economic variables as conditioning information and 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.
|Item Type:||Journal Article|
|Subjects:||H Social Sciences > HB Economic Theory|
|Divisions:||Faculty of Social Sciences > Economics|
|Library of Congress Subject Headings (LCSH):||Rational expectations (Economic theory), Bonds -- United States, Rate of return -- United States -- 20th century, Investments -- Mathematical models, Time and economic reactions|
|Journal or Publication Title:||Journal of Financial and Quantitative Analysis|
|Publisher:||Cambridge University Press|
|Official Date:||6 April 2009|
|Page Range:||pp. 81-100|
|Access rights to Published version:||Open Access|
Andrews, D. W. K. “Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation.” Econometrica, 59 (1991), 817–858.
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