Further analysis of the expectations hypothesis using very short-term rates |
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| Authors: | Craig R Brown Ken B Cyree Mark D Griffiths Drew B Winters |
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| Institution: | 1. Deloitte & Touche, United States;2. Frank R. Day/Mississippi bankers Association Chair, University of Mississippi, Finance Department, 227 Holman Hall, Oxford, MS 38677, United States;3. Jack Anderson Professor of Finance, Farmer School of Business, Miami University, Oxford, Ohio 45056, United States;4. Jerry S. Rawls Professor of Finance, Rawls College of Business, Texas Tech University 79409, Federal Reserve Bank of St. Louis, United States |
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| Abstract: | Longstaff Longstaff, F., 2000. The term structure of very short-term rates: new evidence for the expectations hypothesis. Journal of Financial Economics 58, 397–415] finds support for the expectations hypothesis at the very short end of the repurchase agreement (repo) term structure while other studies find calendar-time-based regularities cause rejection of the expectations hypothesis. Using Longstaff’s methods on a sample of repo rates that pre-dates Longstaff’s sample, we reject the expectations hypothesis for every maturity. The pre-Longstaff-sample repo data comes from a time period where the behavior of short-term interest rates is similar to the long-run average behavior of short-term interest rates. Our results imply that expectations hold when rates are less volatile and/or that we may be entering a period of lower volatility. |
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| Keywords: | E43 G21 |
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