The expectations hypothesis of the term structure of interest rates: The Brazilian case revisited

This article tests the Expectations Hypothesis (EH) using Brazilian monthly data for bond yields spanning the 2000–2017 sample period and ranging in maturity from 3 months to 5 years. Three tests are examined: the first is based on interest rates spread and the other two are based on the forward rates. On balance our results suggest rejection of the EH throughout the maturity spectrum examined, and are broadly consistent with previous findings that a linear combination of forward rates provides a statistically significant prediction of bond excess returns.     

The expectations hypothesis of the term structure of interest rates and monetary policy: some evidence from Asian countries

This article outlines a panel data approach to modelling the term structure of interest rates in the short and in the long run. We find robust evidence supporting the expectations hypothesis of the term structure (EHTS) for a small sample of Asian emerging markets. Furthermore, we detect some relevant differences in the transmission mechanism of monetary policy, and the existence of a McCallum (2005) rule (no exogeneity of monetary policy to the yield curve) in some countries. Finally, we document the influence of an international global factor (i.e. a time-varying global risk premium) on the yield curve, while local country-specific factors are not statistically significant.     

Loss aversion and the term structure of interest rates

This article studies how the loss averse behaviour affects the term structure of real interest rates. Since the pro-cyclical conditional expected marginal rate of substitution, implied from the US consumption data, is consistent with the proposition of loss aversion, we incorporate the loss averse behaviour of prospect theory into the consumption-based asset pricing model. Motivated by the similarity between habit formation and the prospect theory utility, habit formation is exploited to determine endogenously the reference point of this behavioural finance utility. The highly curved characteristic of the term structure of real interest rates can thus be captured by the additional consideration of loss aversion. This model also fits the downward sloping volatility of the real yield curve in the data of US Treasury Inflation-Protection Securities (TIPS). Moreover, depending on the effective risk attitude of the representative agent with the loss averse behaviour of prospect theory, our model is capable of generating a normal or an inverted yield curve.     

Financial integration and the term structure of interest rates

This paper presents a model of the term structure for an open economy. A flexible VAR approach is used to model macroeconomic growth, inflation, short rate and the yield spread. Then the term structure is built given restrictions implied by the no-arbitrage condition. Contrary to previously proposed macrofinance models of the term structure, the model suggested here explicitly accounts for financial and real spillovers between economies. As documented in the paper, foreign macroeconomic factors contain a lot of information about the domestic term structure of yields. Put to data, the model explains the dynamics of yields very well. It provides better out-of-sample forecasting results than the closed economy models. Openness induces more variability in the estimated term premia of yields with shorter maturities.     

Risk-aversion and the term structure of real interest rates

The term structure of real interest rates is studied in the context of a consumption-based general-equilibrium model. It is shown that the expectations hypothesis is approximately satisfied for low interest rate volatility. Otherwise the term premia are generally positive.     

The information content of the term structure of interest rates

The profitability of chartist trading rules on foreign exchange markets is still under debate. Since simple technical trading rules may not adequately capture the complex phenomenon of chartist trading, this study focuses on the prominent head-and-shoulder pattern as a representative trading rule which incorporates various ‘technical’ ideas such as smoothed trends, trend reversal, resistance levels, and volatility clustering. For various combinations of the building blocks of head-and-shoulder definitions the result is generally negative: Returns to head-and-shoulder trading rules are not significantly positive - and if there is any evidence for non-zero returns at all, then it is evidence for negative returns.     

The term structure of interest rates and the Mexican economy

Can the yield spread, which has been found to predict with surprising accuracy the movement of key macroeconomic variables of developed countries, also predict such variables for a developing country experiencing economic turmoil? This article presents empirical results that suggest significant forecasting ability for the yield spread for segments of the Mexican economy during the 1995–1997 period of economic volatility. The actual and predicted variable changes sometimes conflict with those experienced by developed countries in part because of the unusually close relationship between the Mexican Treasury and the Banco de México. Consequently, analysts and policy officials may exploit the forecast potential of the yield spread, but only in the context of evolving institutional considerations.     

Bayesian estimation of cointegrating thresholds in the term structure of interest rates

Threshold Error Correction Models are used to analyse the term structure of interest Rates. The paper develops and uses a generalisation of existing models that encompasses both the Band and Equilibrium threshold models of [Balke and Fomby ((1997) Threshold cointegration. Int Econ Rev 38(3):627–645)] and estimates this model using a Bayesian approach. Evidence is found for threshold effects in pairs of longer rates but not in pairs of short rates. The Band threshold model is supported in preference to the Equilibrium model.

The expectations hypothesis, term premia, and the Canadian term structure of interest rates

In this paper monthly data are used over the period 1960:7 to 1995:12 to examine the determinants of term premia implicit in the Canadian T-bill term structure of interest rates. In sharp contrast to U.S. evidence, the conditional variances of Canadian macroeconomic variables are found to be insignificant predictors of term premia in the Canadian T-bill term structure. The conditional variances of U.S. macroeconomic variables, however, are found to be important determinants of Canadian term premia. JEL Classification: E43, G1
L'hypothese des anticipations, les primes de temps et la structure temporelle des taux d'intérêt canadiens. Ce mémoire utilise des données mensuelles de juillet 1960 à décembre 1995 pour examiner les déterminants des primes de temps implicites dans la structure des taux d'intérêt pour les bons du trésor canadiens. Contrairement à ce que l'on trouve aux Etats-Unis, il semble que les variances conditionnelles des variables macroéconomiques canadiennes ne sont pas des prédicteurs utiles de ces primes. Cependant, il appert que les variances conditonnelles des variables macroéconomiques des Etats-Unis sont des déterminants importants de ces primes.     

Markov-switching models,rational expectations and the term structure of interest rates

In order to evaluate the efficiency of the monetary transmission mechanism, we develop the formulas for testing rational expectations theory in the term structure of interest rates with VAR models of stochastically switching regimes in which all the parameters are regime dependent. These formulas are obtained for the strict version of rational expectations as well as for the case where measurement errors are assumed in the expectations relationship. They are extensible to other contexts that involve variables linked by rational-expectations behaviours. The testing procedure is implemented on interest rates of the Spanish inter-bank money market. Measurement errors must be assumed to find signs favourable to the theory.     

An empirical note on Euro market interest rates,domestic interest rates and the expectations theory of the term structure

An empirical analysis of recent monthly data for 8 currencies indicates that the performance of the expectations theory to explain the short term maturity spectrum of Euro interest rates is rather good in most cases and that it is not related to the degree of integration of Euro and domestic markets.     

中国真实利率的平稳性和区制性:基于马尔科夫区制转换模型

通过引入三种均值方差都可能不同的区制,并基于改进的马尔科夫区制转换模型对1989年2月至2010年4月中国真实利率演变的考察,结果表明不同阶段的真实利率的确存在不同的均值和方差;考虑到区制转换特征之后,真实利率大体平稳,有均值回复趋势。而以往的应用中,忽略了这种区制转换特征可能导致对真实利率预测值的系统性偏差。     

Incomplete markets,liquidation risk,and the term structure of interest rates

We analyse the term structure of interest rates in a general equilibrium model with incomplete markets, borrowing constraint, and positive net supply of government bonds. Uninsured idiosyncratic shocks generate bond trades, while aggregate shocks cause fluctuations in the trading price of bonds. Long bonds command a “liquidation risk premium” over short bonds, because they may have to be liquidated before maturity – following a bad idiosyncratic shock – precisely when their resale value is low – due to the simultaneous occurrence of a bad aggregate shock. Our framework endogenously generates limited cross-sectional wealth heterogeneity among the agents (despite the presence of uninsured idiosyncratic shocks), which allows us to characterise analytically the shape of the entire yield curve, including the yields on bonds of arbitrarily long maturities. Agents? desire to hedge the idiosyncratic risk together with their fear of having to liquidate long bonds at unfavourable terms implies that a greater bond supply raises the level of the yield curve, while an increase in the relative supply of long bonds raises its slope.     

Nonstationarity,cointegration and structural breaks in the Australian term structure of interest rates

This article examines the unit-root property of the Australian short- and long-term interest rates using unit-root tests that accommodate a single or two breaks under the null and/or alternative hypothesis. Two breaks in interest rates are found to coincide with the 1982/83 and 1990/91 recessions or the 1993 inflation targeting period. We further investigate the implications of these structural breaks on the cointegrating relationship implied by the single, linear expectations hypothesis of the term structure of interest rates. While there is evidence that the data are consistent with the expectations hypothesis at the shorter end of the term structure, breaks in interest rates generate a shift in the cointegrating relationship, thus altering the information content of the term structure. Failing to account for a regime shift in the cointegration regression, the data erroneously supports the expectations hypothesis at the longer end of the term structure. These results have profound implications for policy makers who may inadequately exploit the information content of the term structure to predict future changes in inflation.     

The role of uncertainty in the term structure of interest rates: A GARCH-ATSM approach

This article examines the roles of uncertainties regarding various macro-variables in determining risk premiums of bond yields. We develop a multivariate GARCH-VAR to quantify uncertainties regarding inflation, real activities and monetary policy as time-varying conditional variances. We jointly estimate the multivariate GARCH and no-arbitrage bond pricing equations using a maximum likelihood method. The results indicate that the inflation uncertainty is the largest contributor to the dynamics of long-term yields since the 1980s, while the monetary policy uncertainty also plays noticeable roles.     

Instability tests in cointegration relationships. An application to the term structure of interest rates

This paper tries to review, from a practitioner's point of view, the recent strand of literature on cointegration tests allowing for structural changes or parameter instability. Thus, we apply several tests using as an example the expectations model of the term structure of interest rates. The results are consistent with the existence of cointegration between the long and the short run Spanish interest rates, with a vector (1,−1), as predicted by the theory. However, there is also evidence of structural instability, mainly at the beginning of 1994, that can be attributed to the financial changes that occurred in Spain as a result of its external commitments in the process of the European Monetary Union.