Working Paper
Testing the expectations hypothesis when interest rates are near integrated
Abstract: Nominal interest rates are unlikely to be generated by unit-root processes. Using data on short and long interest rates from eight developed and six emerging economies, we test the expectations hypothesis using cointegration methods under the assumption that interest rates are near integrated. If the null hypothesis of no cointegration is rejected, we then test whether the estimated cointegrating vector is consistent with that suggested by the expectations hypothesis. The results show support for cointegration in ten of the fourteen countries we consider, and the cointegrating vector is similar across countries. However, the parameters differ from those suggested by theory. We relate our findings to existing literature on the failure of the expectations hypothesis and to the role of term premia.
Keywords: Cointegration; Interest rates; Econometric models; Rational expectations (Economic theory);
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Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: International Finance Discussion Papers
Publication Date: 2008
Number: 953