Data Management

Predictions Of Short-Term Rates And The Expectations Hypothesis Of The Term Structure Of Interest Rates

Download Now Free registration required

Executive Summary

Despite its important role in monetary policy and finance, the Expectations Hypothesis (EH) of the term structure of interest rates has received virtually no empirical support. The empirical failure of the EH was attributed to a variety of econometric biases associated with the single-equation models used to test it; however, none account for it. This paper analyzes the EH by focusing on its fundamental tenet - the predictability of the short-term rate. This is done by comparing h-month ahead forecasts for the 1- and 3-month Treasury yields implied by the EH with the forecasts from random-walk, Diebold and Lei (2006), and Duffee (2002) models.

  • Format: PDF
  • Size: 972.3 KB