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 1983:1–1996:6. 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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