TY - JOUR
T1 - The expectations hypothesis
T2 - New hope or illusory support?
AU - Jitmaneeroj, Boonlert
AU - Wood, Andrew
PY - 2013/3
Y1 - 2013/3
N2 - Recent studies of the expectations hypothesis of the term structure (EHTS) find evidence in favor of the EHTS using post 1980s US data. This has been attributed to the relative macro stability of this period and greater market efficiency. Using a panel of forecasts for 3-month interest rates for ten countries we test separately for EHTS and rational expectations. Assuming rational expectations holds we find support for the EHTS is illusory due to an off-setting time-varying term premia and non-rational expectations. Previous forecast-based studies suggest biased expectations tend to reinforce the effect of a time varying term premium. This change can be understood in the context of Fama's (2006) argument that markets tend to underestimate future spot rates during periods of long-run increases and overestimate during declines.
AB - Recent studies of the expectations hypothesis of the term structure (EHTS) find evidence in favor of the EHTS using post 1980s US data. This has been attributed to the relative macro stability of this period and greater market efficiency. Using a panel of forecasts for 3-month interest rates for ten countries we test separately for EHTS and rational expectations. Assuming rational expectations holds we find support for the EHTS is illusory due to an off-setting time-varying term premia and non-rational expectations. Previous forecast-based studies suggest biased expectations tend to reinforce the effect of a time varying term premium. This change can be understood in the context of Fama's (2006) argument that markets tend to underestimate future spot rates during periods of long-run increases and overestimate during declines.
KW - Expectations hypothesis
KW - Rational expectations
KW - Term structure
UR - http://www.scopus.com/inward/record.url?scp=84872261251&partnerID=8YFLogxK
U2 - 10.1016/j.jbankfin.2012.11.013
DO - 10.1016/j.jbankfin.2012.11.013
M3 - Article
AN - SCOPUS:84872261251
SN - 0378-4266
VL - 37
SP - 1084
EP - 1092
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
IS - 3
ER -