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A Reconciliation of Some Paradoxical Empirical Results on the Expectations Model of the Term Structure[Note 1. We are grateful to Steve Satchell, Andrew Scott, Ron ...]
Author(s) -
Driffill John,
Psaradakis Zacharias,
Sola Martin
Publication year - 1997
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/1468-0084.00048
Subject(s) - yield curve , term (time) , econometrics , economics , variety (cybernetics) , component (thermodynamics) , interest rate , yield (engineering) , affine term structure model , mathematics , statistics , macroeconomics , thermodynamics , materials science , metallurgy , physics , quantum mechanics
In this paper we attempt to reconcile contradictory empirical results for the expectations model of the term structure which are found when it is tested by a variety of methods based on single‐equation and VAR models. Using monthly data for one‐month and three‐month interest rates, we show that the expectations hypothesis is rejected for the US and UK term structures on the basis of some popular tests. However, tests based on VAR models or on IV regressions of yield spreads on future short rate changes provide no evidence against the expectations model with a random component in the term premium.