Testing the Expectations Hypothesis of the Term Structure of Interest Rates in the Presence of a Potential Regime Shift

No 20/1999, Research Discussion Papers from Bank of Finland

Abstract: The expectations hypothesis of the term structure of interest rates is tested using monthly Eurodollar deposit rates for maturities 1, 3 and 6 months covering the period 1983:1–1996:6. Whereas classical regression-based tests indicate rejection, tests based on a new model allowing for potential – but unrealized – regime shifts provide support for the expectations hypothesis. The peso problem is modelled by means of a threshold autoregression. The estimation results suggest that potential regime shift had an effect on expectations concerning the longer-term interest rate only for a short while in the early phase of the sample period, when interest rates were at their highest.

Keywords: peso problem; TAR models; term structure of interest rates (search for similar items in EconPapers)
Date: Written 1999-12-21
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Related works:
Working Paper: TESTING THE EXPECTATIONS HYPOTHESIS OF THE TERM STRUCTURE OF INTEREST RATES IN THE PRESENCE OF A POTENTIAL REGIME SHIFT (2000)
Journal Article: Testing the Expectations Hypothesis of the Term Structure of Interest Rates in the Presence of a Potential Regime Shift (2003)
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