The Empirical Failure of the Expectations Hypothesis of the Term Structure of Bond Yields

CFA Digest ◽  
2007 ◽  
Vol 37 (3) ◽  
pp. 23-24
Author(s):  
Richard D. Long
Keyword(s):  
Term Structure ◽  
Bond Yields ◽  
Expectations Hypothesis

A Consumption Based Term Structure Model w ith Habit Utility

2018 ◽  
Vol 9 (6) ◽  
pp. 484-496
Author(s):  
Jun Lou ◽  
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Term Structure ◽  
Yield Curve ◽  
Bond Yields ◽  
Expectations Hypothesis ◽  
Term Structure Model ◽  
Bond Risk Premia ◽  
The Interest Rate ◽  
Bond Risk

This paper proposes a term structure of interest rates model that modifies and extends the Campbell and Cochrane (1999) surplus consumption framework. The distinguishing contributions are tractable, continuous-time analytical solutions for the term structure of interest rate generating a realistic upward sloping yield curve. Despite the focus on the term structure, the model matches plausible equity quantities. For the interest rate, the model is able to account for the moments of bond yields at numerous maturities and produce countercyclical bond risk premia as seen in the data. Moreover, the model captures reasonable time series fluctuation on real interest rates. However, the model has difficulties reproducing empirical deviations from the expectations hypothesis.

scholarly journals The Empirical Failure of the Expectations Hypothesis of the Term Structure of Bond Yields

2007 ◽  
Vol 42 (1) ◽  
pp. 81-100 ◽  
Author(s):  
Lucio Sarno ◽  
Daniel L. Thornton ◽  
Giorgio Valente
Keyword(s):  
Term Structure ◽  
Lagrange Multiplier ◽  
Sample Period ◽  
Lagrange Multiplier Test ◽  
Bond Yields ◽  
Test Power ◽  
Monthly Data ◽  
Expectations Hypothesis ◽  
Testing Procedures ◽  
Conditioning Information

AbstractThis 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.

The term structure of Eurozone peripheral bond yields: an asymmetric regime-switching equilibrium correction approach

2019 ◽  
Vol 24 (4) ◽  
Author(s):  
Christos Avdoulas ◽  
Stelios Bekiros ◽  
Brian Lucey
Keyword(s):  
Term Structure ◽  
Regime Switching ◽  
Yield Curve ◽  
Bond Yields ◽  
Short Term ◽  
Economic Implications ◽  
Expectations Hypothesis ◽  
The Difference ◽  
The Business Cycle ◽  
Equilibrium Correction

AbstractSeveral studies have established the predictive power of the yield curve i.e. the difference between long and short-term bond rates and the role of asymmetries in the term structure of bond yields with respect to real economic activity. Using an extensive dataset, comprising 3-month, 1-year, 5-year and 10-year constant maturity Treasury bonds for the Eurozone southern periphery countries – the so-called “PIIGS” – from January 1999 to April 2019, we investigate the links between bond yields of different maturities for the Eurozone southern peripheral countries and we find they co-evolve in line with the predictions of the Expectations Hypothesis theory. We demonstrate the presence of nonlinearities in the term structure, and utilize a multivariate asymmetric two-regime Markov-switching VAR methodology to model them properly. Moreover, we address the economic reasoning behind the introduction of an equilibrium-correction regime-switching approach, hence providing potentially important insights on the behaviour of the entire yield curve. We reveal that the regime shifts are related to the state of the business cycle, particularly in economies in which monetary policy decisions are implemented via changes in short-term rates as a response to deviations of output from equilibrium levels. Our results may have important statistical and economic implications on the behaviour of the term structure of bond yields.

scholarly journals Does The Expectations Hypothesis Explain The Term Structure Of Treasury Bond Yields In Tunisia?

2015 ◽  
Vol 32 (1) ◽  
pp. 239
Author(s):  
Jamel Boukhatem
Keyword(s):  
Term Structure ◽  
Yield Curve ◽  
Aggregate Demand ◽  
Bond Market ◽  
Bond Yields ◽  
Monthly Data ◽  
Expectations Hypothesis ◽  
Cointegrated Var ◽  
Treasury Bond ◽  
One Year

<p><em>This paper tests the expectations hypothesis (EH) using monthly data for Treasury bond yields (TBYs) over the period 1994m5–2014m12 and ranging in maturity from one year to 10 years. We apply cointegrated-VAR jointly on more than one pair of yields. The results suggest rejection of the EH throughout the medium maturity spectrum. However, for longer maturities they suggest the validity of the EH for the TBYs. This indeed confirms the smooth functioning of Tunisian bond market which gives an indication that the yield curve should serve as an indicator to the monetary policymakers to manage inflation and to influence the aggregate demand in the economy.</em></p><p><strong> </strong></p>

Term Structure Models

2017 ◽  
Author(s):  
Kerry E. Back
Keyword(s):  
Term Structure ◽  
Yield Curve ◽  
Model Parameters ◽  
Bond Yields ◽  
Expectations Hypothesis ◽  
Forward Rates ◽  
Affine Models ◽  
Deterministic Function ◽  
Root Model ◽  
Quadratic Models

Bond yields and forward rates are defined. The fundamental PDE is derived. Affine term strucure models are explained, including the Vasicek model and the Cox‐Ingersoll‐Ross square root model. Gaussian affine models, completely affine models, and multifactor CIR models are explained. Quadratic models are described. The various versions of the expectations hypothesis are explained. We can fit a given yield curve by adding a deterministic function of time to an interest rate model or allowing model parameters to be time varying. Heath‐Jarrow‐Morton models are explained, and it is shown that drifts of forward rates under the risk neutral probability are determined by their volatilities.

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