What explains deviations in the unbiased expectations hypothesis? Market irrationality vs. the peso problem

Cathy Yi-Hsuan Chen, I-Doun Kuo and Thomas C. Chiang

Journal of International Financial Markets, Institutions and Money, 2014, vol. 30, issue C, 172-190

Abstract: Evidence from this study suggests that investor sentiment and the peso problem play a significant role in explaining expectation errors, rejecting the unbiased expectation hypothesis (UEH). The deviation of the UEH for long-term rates is mainly attributable to expectation errors, whereas the deviation of short-term rates is tied to the term premium. We decompose expectation errors and find that irrationality is more apparent in crisis periods, and the rational component becomes an influential factor in tranquil periods.

Keywords: Expectations hypothesis; Term structure of interest rates; Sentiment; Expectation error; Peso problem (search for similar items in EconPapers)
JEL-codes: E43 G12 G14 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:30:y:2014:i:c:p:172-190

DOI: 10.1016/j.intfin.2014.01.009

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