Abstract
The paper employs daily interest rates from the short-end of the Eurocurrency market in order to test the validity of the Expectations Hypothesis (EH). In particular, exploiting the stochastic trends embedded in the time series the EH implications are tested in a multivariate cointegration framework. The empirical findings indicate that once daily rates are used the estimated coefficients are very close to their theoretical values as predicted by the EH. Furthermore, we cannot reject the hypothesis that the EH is an adequate description of the US yield curve. Similarly, for the German and UK yield curves the number of common stochastic trends present in their yield curves is consistent with the EH. However, the restrictions imposed by the theory on parameters of the cointegration space are rejected.
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Drakos, K. A Daily View of the Term Structure Dynamics: Some International Evidence. De Economist 150, 41–52 (2002). https://doi.org/10.1023/A:1014851101861
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DOI: https://doi.org/10.1023/A:1014851101861