Predictions of short-term rates and the expectations hypothesis
Massimo Guidolin () and
Daniel Thornton ()
No 2010-013, Working Papers from Federal Reserve Bank of St. Louis
Despite its role in monetary policy and finance, the expectations hypothesis (EH) of the term structure of interest rates has received virtually no empirical support. The empirical failure of the EH was attributed to a variety of econometric biases associated with the single-equation models most often used to test it, although no bias seems to account for the extent and magnitude of the failure. This paper analyzes the EH by focusing on the predictability of the short-term rate. This is done by comparing h-month ahead forecasts for the 1- and 3-month Treasury bill yields implied by the EH with the forecasts from random-walk, Diebold and Li?s (2006), and Duffee?s (2002) models. The evidence suggests that the failure of the EH is likely a consequence of market participants? inability to adequately predict the short-term rate, in that none of these models out-performs a simple random walk model in recursive, real time experiments. Using standard methods that take into account the additional uncertainty caused by the need to estimate model parameters, the null hypothesis of equal predictive accuracy of each models relative to the random walk alternative is never rejected.
Keywords: Rational expectations (Economic theory); Interest rates (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-for, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8) Track citations by RSS feed
Downloads: (external link)
Journal Article: Predictions of short-term rates and the expectations hypothesis (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:2010-013
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Working Papers from Federal Reserve Bank of St. Louis Contact information at EDIRC.
Bibliographic data for series maintained by ().