The Empirical Failure of the Expectations Hypothesis of the Term Structure of Bond Yields

Lucio Sarno, Daniel Thornton and Giorgio Valente ()

No 5259, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper tests the expectations hypothesis (EH) using US monthly data for bond yields spanning the 1952-2003 sample period and ranging in maturity from 1 month to 10 years. We apply the Lagrange multiplier test developed by Bekaert and Hodrick (2001) and extend it to increase the test power: (a) by introducing economic variables as conditioning information; and (b) by using more than two bond yields in the model and testing the EH jointly on more than one pair of yields. While the conventional bivariate procedure provides mixed results, the more powerful testing procedures suggest rejection of the EH throughout the maturity spectrum examined.

Keywords: Expectations hypothesis; Term structure of interest rates; Vector autoregression (search for similar items in EconPapers)
JEL-codes: E43 G10 (search for similar items in EconPapers)
Date: 2005-09
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: The Empirical Failure of the Expectations Hypothesis of the Term Structure of Bond Yields (2007)
Working Paper: The empirical failure of the expectations hypothesis of the term structure of bond yields (2005)
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