New Evidence On The Expectations Theory For UK Term Structure

This paper extends the empirical evidence on the Expectations Theory (ET) in the UK term structure using recent developments in the testing methodology and looking at multiple conventional maturity pairs across the term structure spectrum. Although different tests yield different conclusions about the validity of the ET in some cases, there are maturity pairs and time periods for which all tests seem to agree. All testing methods are surprisingly positive about the ET at the longest end and when the ET is rejected it occurs only at the short end of the maturity spectrum irrespective of the method used. Moreover, none of the tests have rejected the theory in the first sub-sample which ends before the introduction of inflation targeting in 1992.