Scandinavian Working Papers in Economics
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Bank of Finland Research Discussion Papers, Bank of Finland

No 20/1999:
Testing the Expectations Hypothesis of the Term Structure of Interest Rates in the Presence of a Potential Regime Shift

Markku Lanne ()

Abstract: The expectations hypothesis of the term structure of interest rates is tested using monthly Eurodollar deposit rates for maturities 1, 3 and 6 months covering the period 1983:11996:6. Whereas classical regression-based tests indicate rejection, tests based on a new model allowing for potential but unrealized regime shifts provide support for the expectations hypothesis. The peso problem is modelled by means of a threshold autoregression. The estimation results suggest that potential regime shift had an effect on expectations concerning the longer-term interest rate only for a short while in the early phase of the sample period, when interest rates were at their highest.

Keywords: peso problem; TAR models; term structure of interest rates; (follow links to similar papers)

19 pages, December 21, 1999

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