The Yield Curve and the Interest Rates Expectations on Fixed Income Market in Colombia Between 2002 and 2007

Diego Agudelo () and Mónica Arango Arango ()
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Mónica Arango Arango: Programa de Ingeniería Financiera, Universidad de Medellín, Postal: carrera 87 No.30-65, oficina 4-104, Medellín, Colombia

Lecturas de Economía, 2008, issue 68, 39-66

Abstract: How does the yield curve incorporate expectations on the Colombian future short-term interest rates? Two theories have been proposed to explain it: the Expectation Hypothesis and the Liquidity Preference Hypothesis. This paper tests both theories for the TES yield curve as well as for the CDT yield curve, using time-series models that account for the persistence and heteroskedasticity of interest rates. The results support the Liquidity Preference Hypothesis, consistent with the fact that in Colombia long-term rates have been consistently higher than short-term rates. However we found evidence of some predictive power of the long-term rates on the future short term rates, consistent with the Expectation Hypothesis.

Keywords: expectations hypothesis; liquidity preference theory; term structure of interest rates; capital markets; fixed income (search for similar items in EconPapers)
JEL-codes: E40 E43 (search for similar items in EconPapers)
Date: 2008
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