The expectations hypothesis with non-negative rates

Abstract.

We demonstrate the existence of models of the term structure of interest rates in which various forms of the expectations hypothesis hold. The new feature of these examples, which distinguishes them from those constructed by McCulloch, Riedel, and Fisher and Gilles, is that the spot rate is always non-negative. The original example of McCulloch, and the later examples of Riedel, and Fisher and Gilles, were constructed to refute the claim by Cox, Ingersoll and Ross that only the local expectations hypothesis is compatible with equilibrium in a stochastic environment.