 Testing the expectations hypothesis of the term structure with permanent-transitory component modelsJournal of Banking & Finance, 2013, vol. 37, issue 8, 3192-3203 Abstract: This study proposes a new application of Permanent-Transitory Component Models (PTCMs) to test the Expectation Hypothesis of the Term Structure (EHTS). Unlike previous approaches, tests based on PTCMs can simultaneously detect departures from rational expectations and time varying term premia. We set out analytically and empirically the links across previous tests and PTCMs. We also show that PTCMs identify an additional restriction for rational expectations, on top of the one-to-one relationship between forward and spot rates, that must be imposed in estimations of term premia. Data for the short-end of the US term structure suggest that both factors contribute to the rejection of the EHTS. Moreover, the empirical estimates of term premia are persistent and exhibit sign fluctuations. Their stochastic properties depend crucially on whether the additional restriction for rational expectations is imposed in estimation. Keywords: Term structure of interest rates; Kalman filter; MC simulations (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:8:p:3192-3203 DOI: 10.1016/j.jbankfin.2013.02.025 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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