Direct tests of the expectations theory of the term structure: Survey expectations, the term premium and coefficient biases

Smant, David / D.J.C. (2010): Direct tests of the expectations theory of the term structure: Survey expectations, the term premium and coefficient biases.

Abstract

Many studies have reported on various empirical tests of the expectations theory of the term structure of interest rates (ET). Although a common perception seems to be that the ET is rejected by the empirical tests, the overall evidence is actually mixed between frequent support and occasional rejection of the ET and requires careful interpretation. The discussion and empirical results presented in this paper show that after taking into account the weaknesses of the perfect-foresight-with-error expectations hypothesis and taking into account the coefficient bias caused by term premium and forecast errors, the expectations theory fits the term structure data very well.

• Item Type: MPRA Paper
• Language: English
• Keywords: Expectations theory, term structure of interest rates, survey expectations, term premium
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; G - Financial Economics > G1 - General Financial Markets > G10 - General

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