Testing the expectations hypothesis using zero yields for US treasuries

Paweł Miłobędzki 

Uniwersytet Gdański Wydział Zarządzania (WZR), Armii Krajowej 101, Sopot 81-824, Poland

Abstract

In this paper I provide a simple test of the expectations hypothesis of the term structure of interest rates (EH) for US treasuries embedded in a single equation stetting. Having found that zero yields for the treasuries of different maturities between 1970 and 2009 constructed by Jungbacker, Koopman and van der Wel (Smooth Dynamic Factor Analysis with Application to the U.S. Term Structure of Interest Rates, Journal of Applied Econometrics 2014, 29 (1), 65-90) are likely to be stationary albeit extremely persistent, I use the GMM to estimate the perfect foresight long rate equation and test for whether its slope equals to unity as predicted by the EH. When exhibiting a time-varying term premium with the Fourier flexible form I cannot reject the null for all maturities but 120 months. Since the finite sample properties of GMM estimators and tests may not be well approximated by a conventional asymptotics I validate this result by a Monte Carlo simulation. 

 

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Presentation: Oral at Current Economic and Social Topics 2015, by Paweł Miłobędzki
See On-line Journal of Current Economic and Social Topics 2015

Submitted: 2015-12-03 12:34
Revised:   2015-12-04 15:45