Further analysis of the expectations hypothesis using very short-term rates

Craig R. Brown, Ken B. Cyree, Mark D. Griffiths and Drew B. Winters

Journal of Banking & Finance, 2008, vol. 32, issue 4, 600-613

Abstract: Longstaff [Longstaff, F., 2000. The term structure of very short-term rates: new evidence for the expectations hypothesis. Journal of Financial Economics 58, 397-415] finds support for the expectations hypothesis at the very short end of the repurchase agreement (repo) term structure while other studies find calendar-time-based regularities cause rejection of the expectations hypothesis. Using Longstaff's methods on a sample of repo rates that pre-dates Longstaff's sample, we reject the expectations hypothesis for every maturity. The pre-Longstaff-sample repo data comes from a time period where the behavior of short-term interest rates is similar to the long-run average behavior of short-term interest rates. Our results imply that expectations hold when rates are less volatile and/or that we may be entering a period of lower volatility.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:32:y:2008:i:4:p:600-613

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