ePrints

Testing the expectations hypothesis of the term structure with permanent-transitory component models

Lookup NU author(s): Dr Fabrizio Casalin

Downloads

• Accepted version [.pdf]

Abstract

This study proposes a new application of Permanent-Transitory Com- ponent Models (PTCMs) to test the Expectation Hypothesis of the Term Structure (EHTS). Unlike previous approaches based on single regressions and VECMs, PTCMs can separately model departures from rational ex- pectations and time varying term premia. Using data for the US T-bill market we find that both the factors contribute to the rejection of the EHTS. We highlight analytically as well as empirically the link across single regressions, VECMs and PTCMs. PTCMs are then used to de- tect term premia under rational expectations. Empirical estimates are persistent, reasonable in magnitude, and exhibit sign fluctuations.

Publication metadata

Author(s): Casalin F

Publication type: Article

Publication status: Published

Journal: Journal of Banking & Finance

Year: 2013

Volume: 37

Issue: 8

Pages: 3192-3203

Print publication date: 15/03/2013

Date deposited: 08/04/2011

ISSN (print): 0378-4266

ISSN (electronic): 1872-6372

Publisher: Elsevier BV

URL: http://dx.doi.org/10.1016/j.jbankfin.2013.02.025

DOI: 10.1016/j.jbankfin.2013.02.025

Altmetrics

Share