Financial Factors, Macroeconomic Information and the Expectations Theory of the Term Structure of Interest Rates

Iryna Kaminska, Andrea Carriero and Carlo Favero

No 76, Computing in Economics and Finance 2004 from Society for Computational Economics

Abstract: In this paper we concentrate on the hypothesis that the empirical rejections of the Expectations Theory(ET) of the term structure of interest rates can be caused by improper modelling of expectations. Our starting point is an interesting anomaly found by Campbell-Shiller(1987), when by taking a VAR approach they abandon limited information approach to test the ET, in which realized returns are taken as a proxy for expected returns. We use financial factors and macroeconomic information to construct a test of the theory based on simulating investors' effort to use the model in `real time' to forecast future monetary policy rates. Our findings suggest that the importance of fluctuations of risk premia in explaining the deviation from the ET is reduced when some forecasting model for short-term rates is adopted and a proper evaluation of uncertainty associated to policy rates forecast is considered

Keywords: Expectations Theory; Macroeconomic information in Finance (search for similar items in EconPapers)
JEL-codes: E43 E44 E47 (search for similar items in EconPapers)
Date: 2004-08-11
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Financial factors, macroeconomic information and the Expectations Theory of the term structure of interest rates (2006)
Working Paper: Financial Factors, Macroeconomic Information and the Expectations Theory of the Term Structure of Interest Rates (2004)
Working Paper: Financial Factors, Macroeconomic Information and the Expectations Theory of the Term Structure of Interest Rates (2004)
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