Short and long run tests of the expectations hypothesis: the Portuguese case

Silva Lopes, Artur C. B. da and Monteiro, Olga Susana (2008): Short and long run tests of the expectations hypothesis: the Portuguese case.

Abstract

The purpose of this paper is to test both short- and long-run implications of the (rational) expectations hypothesis of the term structure of interest rates using Portuguese data for the interbank money market. The results support only a very weak, long-run or "asymptotic" version of the hypothesis, and broadly agree with previous (but separate) evidence for other countries. Empirical evidence supports the cointegration of Portuguese rates and the "puzzle" well known in the literature: although its forecasts of future short-term rates are in the correct direction, the spread between longer and shorter rates fails to forecast future longer rates. Further short-run implications of the hypothesis in terms of the predictive ability of the spread are also clearly rejected, even for the more stable period which emerged in the middle nineties.

• Item Type: MPRA Paper
• Language: English
• Keywords: Term structure; Expectations hypothesis; Hypothesis testing; Structural breaks; Portugal
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes

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