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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Abstract

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
ISSN:	0022-1090
Date:	6 April 2009
Volume:	Vol.47
Number:	No.1
Page Range:	pp. 81-100
Identification Number:	10.1017/S0022109000002192
Status:	Peer Reviewed
Access rights to Published version:	Open Access
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URI:	http://wrap.warwick.ac.uk/id/eprint/676

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