On Biases in Tests of the Expecations Hypothesis of the Term Structure Of Interest Rates

Geert Bekaert, Robert Hodrick () and David Marshall

No 191, NBER Technical Working Papers from National Bureau of Economic Research, Inc

Abstract: We document extreme bias and dispersion in the small sample distributions of five standard regression tests of the expectations hypothesis of the term structure of interest rates. These biases derive from the extreme persistence in short interest rates. We derive approximate analytic expressions for these biases, and we characterize the small-sample distributions of these test statistics under a simple first-order autoregressive data generating process for the short rate. The biases are also present when the short rate is modeled with a more realistic regime-switching process. The differences between the small-sample distributions of test statistics and the asymptotic distributions partially reconcile the different inferences drawn when alternative tests are used to evaluate the expectations hypothesis. In general, the test statistics reject the expectations hypothesis more strongly and uniformly when they are evaluated using the small-sample distributions, as compared to the asymptotic distributions.

Date: 1996-01
New Economics Papers: this item is included in nep-ifn
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Published as Journal of Financial Economics, Vol.44 (June 1997): 309-348.

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Related works:
Journal Article: On biases in tests of the expectations hypothesis of the term structure of interest rates (1997)
Working Paper: On biases in tests of the expectations hypothesis of the term structure of interest rates (1996)
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