Investigating the expectation hypothesis and the risk premium dynamics: new evidence for Brazil
- 8 Downloads
We re-examine the validity of the expectation hypothesis (EH) of the term structure for the Brazilian fixed income market, using data from January 2000 to June 2017. Furthermore, we investigated the out-of-sample predictability of bond excess returns by means of common factors extracted from a cross-section of Brazilian macro-variables and zero-coupon interest rates. The EH is rejected throughout the term structure examined on the basis of the statistical tests across the entire maturity spectrum considered. Our results confirm previous findings, mostly obtained for developed markets, that a linear combination of forward rates and macroeconomic factors can explain a substantial portion of movements in bonds excess returns, contributing novel and up-to-date evidence from a large and dynamic emerging bond market, such as Brazil. Furthermore, we find that the factor extracted from a large panel of macroeconomic variables generates significant gains in forecasting bond excess returns relative to yield curve information.
KeywordsExpectation hypothesis Bond risk premia Factor models Excess return predictability Out-of-sample forecasts
JEL ClassificationC53 E43 G17
João F. Caldeira gratefully acknowledges support provided by CNPq under Grants 430192/2016-9 and 306886/2018-9.
Compliance with ethical standards
Conflict of interest
João F. Caldeira declares that he has no conflict of interest.
This article does not contain any studies with human participants performed by any of the authors.
- Bernanke BS, Blinder AS (1992) The federal funds rate and the channels of monetary transmission. Am Econ Rev 82(4):901–921Google Scholar
- Fama EF, Bliss RR (1987) The information in long-maturity forward rates. Am Econ Rev 77(4):680–692Google Scholar
- Lima AMC, Issler JV (2007) A Estrutura a Termo das Taxas de Juros no Brasil: Testando a Hipótese de Expectativas. Pesquisa e Planejamento Econômico 37(1):113–148Google Scholar
- Tabak B, Andrade SC (2003) Testing the expectations hypothesis in the brazilian term structure of interest rates. Revista Brasileira de Finanas 2(1):19–43Google Scholar