Testing the Expectations Hypothesis in the Emerging Markets of the Middle East: An Application to Egyptian and Lebanese Treasury Securities

  • Sam Hakim
  • Simon Neaime
Chapter

Abstract

For many years, and despite many rejections,1 the expectations hypothesis remains the widely accepted premise believed to explain the shape of the yield curve. In its simplest form, the expectations theory suggests that the current long-term interest rate is a weighted average of current and expected future short-term rates. In this setting, the spread between long- and short-term rates predicts future changes in short rates. Changes in the slope of the yield curve depend on interest expectations, with steeper yield curves foreboding greater expectations of rate changes.

Keywords

Interest Rate Monetary Policy Unit Root Term Structure Yield Curve 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.
This is a preview of subscription content, log in to check access.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Boothe, P. (1991) “Interest Parity, Cointegration, and the Term Structure in Canada and the United States,” Canadian Journal of Economics, 24 (3): 499–516.CrossRefGoogle Scholar
  2. Beechey, M., Hjalmarsson, E., and Osterholm, P. (2009) “Testing the Expectations Hypothesis When Interest Rates Are Near Integrated,” Journal of Banking and Finance, 33 (5): 934–943.CrossRefGoogle Scholar
  3. Bradley, M. G. and Lumpkin, S. A. (1992) “The Treasury Yield Curve as a Cointegrated System,” Journal of Financial and Quantitative Analysis, 27 (3): 449–463.CrossRefGoogle Scholar
  4. Brennan, M. and Schwartz, E. (1979) “A Continuous Time Approach to the Pricing of Bonds,” Journal of Banking and Finance, 3 (2): 133–155.CrossRefGoogle Scholar
  5. Campbell, J. Y. (1995) “Some Lessons Irom the Yield Curve,” Journal of Economic Perspectives, 9 (3): 1986–1998.Google Scholar
  6. Campbell, J. Y and Shiller, R. J. (1987) “Cointegration and Tests of Present Value Models,” Journal of Political Economy, 95: 1062–1088.CrossRefGoogle Scholar
  7. Chong, B. S., Liu, M.-LL, and Shrestha, K. (2006) “Monetary Transmission Via the Administered Interest Rate Channels,” Journal of Banking and Finance, 30 (5): 1467–1484.CrossRefGoogle Scholar
  8. Cox J., Ingersoll, J., and Ross, S. (1985) “A Theory of the Term Structure of Interest Rates,” Econometrica, 53 (2): 385–407.CrossRefGoogle Scholar
  9. Crockett, J. A. (1998) “Rational Expectations, Inflation and the Nominal Interest Rate,” Journal of Econometrics, 83 (1–2): 349–363.CrossRefGoogle Scholar
  10. De Graeve, F., Dejonghe, O., and Vander Vennet, R. (2007) “Competition, Transmission and Bank Pricing Policies: Evidence from Belgian Loan and Deposit Markets,” Journal of Banking and Finance, 31: 259–278.CrossRefGoogle Scholar
  11. Engel, R. F. and Granger, W. J. (1987) “Co-Integration and Error Correction: Representation Estimation and Testing,” Econometrica, 55: 251–276.CrossRefGoogle Scholar
  12. Engel, R. F., Lilien, D. M., and Robins, R. P. (1987) “Estimating Time Varying Risk Premia in the Term Structure: The ARCH-M Model,” Econometrica, 55 (2): 391–407.CrossRefGoogle Scholar
  13. Engsted, T. and Tanggaard, C. (1994) “Cointegration and the US Term Structure,” Journal of Banking and Finance, 18 (3): 167–181.CrossRefGoogle Scholar
  14. Froot, K. A. (1989) “New Hope lor the Expectations Hypothesis of the Term Structure of Interest Rates,” Journal of Finance, 44 (2): 283–305.CrossRefGoogle Scholar
  15. Haddad, M. and Hakim, S. (2008) “The Impact of War and Terrorism on Sovereign Risk in the Middle East,” Journal of Derivatives and Hedge Funds, 14: 237–250.CrossRefGoogle Scholar
  16. Haddad, M. and Hakim, S. (2007) “The Cost of Sovereign Lending in the Middle East alter September 11,” Journal for Global Business Advancement, 1 (1): 127–139.CrossRefGoogle Scholar
  17. Hall, A. D., Anderson, H. M., and Granger, C. W. (1992) “A Cointegration Analysis of Treasury Bill Yields,” The Review of Economics and Statistics, 74 (2): 117–126.Google Scholar
  18. Hammoudeh, S., Sari, R., and Ewing, B. (2009) “Relationships among Strategic Commodities and with Financial Variables: A New Look,” Contemporary Economic Policy, 27 (2): 251–264.CrossRefGoogle Scholar
  19. Heath, D., Jarrow, R., and Morton A. (1992) “Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation,” Econometrica, 60 (2): 77–105.CrossRefGoogle Scholar
  20. Hull, J. and White, A. (1996) “Using Hull-White Interest Rate Trees,” Journal of Derivatives, 3 (3): 26–36.CrossRefGoogle Scholar
  21. Jarque, C. and Bera, A. (1980) “Efficient Tests for Normality Homoskesdasticity and Serial Independence of Regression Residuals,” Econometric Letters, 6 (6): 255–259.CrossRefGoogle Scholar
  22. Johansen, S. (1988) “Statistical Analysis of Cointegrating Vectors,” Journal of Economics Dynamics and Control, 12 (3): 231–254.CrossRefGoogle Scholar
  23. Johansen, S. (1991) “Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Auto Regressive Models,” Econometrica, 59 (6): 1551–1580.CrossRefGoogle Scholar
  24. Johansen, S. and Juselius, K. (1990) “Maximum Likelihood Estimation and Inference on Cointegration with Application to the Demand for Money,” Oxford Bulletin of Economics and Statistics, 52 (4): 169–210.Google Scholar
  25. Johansen, S. and Juselius, K. (1992) “Testing Structural Hypotheses in a Multivariate Cointegration Analysis of the PPP and the UIP for UK,” Journal of Econometrics, 53 (3): 211–244.CrossRefGoogle Scholar
  26. Kleimeier, S. and Sander, H. (2006) “Expected Versus Unexpected Monetary Policy Impulses and Interest Rate Pass-through in Euro-Zone Retail Banking,” Journal of Banking and Finance, 30 (2): 1839–1870.CrossRefGoogle Scholar
  27. Lardic, S. and Mignon, V. (2004) “Fractional Cointegration and the Term Structure,” Empirical Economics, 29 (1): 723–736.CrossRefGoogle Scholar
  28. Lee, T. K. and Tse, Y. K. (1991) “Term Structure of Interest Rates in the Singapore Asian Dollar Market,” Journal of Applied Econometrics, 6 (3): 143–152.CrossRefGoogle Scholar
  29. Liu, M.-H., Margaritis, D., and Tourani-Rad, A. (2008) “Monetary Policy Transparency and Pass-Through of Retail Interest Rates,” Journal of Banking and Finance, 32 (4): 501–511.CrossRefGoogle Scholar
  30. Macdonald, R. and Speight, A. (1988) “The Term Structure of Interest Rates in the UK,” Bulletin of Economic Research, 40 (1): 287–299.Google Scholar
  31. Mackinnon, J. G. (1991) “Critical Values for Cointegration Tests,” UC San Diego Discussion Paper 90–4, San Diego.Google Scholar
  32. Mills, T. C. (1991) “The Term Structure of UK Interest Rates: Tests of the Expectations Hypothesis,” Applied Economics, 23 (3): 599–606.CrossRefGoogle Scholar
  33. Ozatay, R, Ozmen, E., and Sahinbeyoglu, G. (2009) “Emerging Market Sovereign Spreads, Global Financial Conditions and US Macroeconomic News,” Economic Modelling, 26 (2): 526–531.CrossRefGoogle Scholar
  34. Pesando, J. (1978) “On the Efficiency of the Bond Market: Some Canadian Evidence,” Journal of Political Economy, 86 (4): 1057–1076.CrossRefGoogle Scholar
  35. Phillips, P. C. B. (1987) “Time Series Regression with a Unit Root,” Econometrica, 55 (6): 227–301.Google Scholar
  36. Phillips, P. C. B. (1987) “Towards a Unified Asymptotic Theory for Autoregression,” Biometrika, 74 (6): 535–547.CrossRefGoogle Scholar
  37. Phillips, P. C. B. and Ouliaris, S. (1988) “Testing for Cointegration Using Principal Components Methods,” Journal of Economic Dynamics and Control, 12 (3): 205–230.CrossRefGoogle Scholar
  38. Phillips, P. C. B. and Perron, P. (1988) “Testing for Unit Roots in Time Series Regression,” Biometrika, 75 (1): 335–346.CrossRefGoogle Scholar
  39. Ritchken, P. and Sankarasubramanian, L. (1995) “Volatility Structures of Forward Rates and the Dynamics of the Term Structure,” Mathematical Finance, 3 (1): 55–72.CrossRefGoogle Scholar
  40. Shiller, R. (1979) “The Volatility of Long-Term Interest Rates and the Expectations Model of the Term Structure,” Journal of Political Economy, 87 (3): 1190–1219.CrossRefGoogle Scholar
  41. Stock, J. and Watson, M. (1988) “Testing lor Common Trends,” Journal of the American Statistical Association, 83 (5): 1097–1107.CrossRefGoogle Scholar
  42. Taylor, M. P. (1992) “Modeling the Yield Curve,” The Economic Journal, 102 (4): 524–537.CrossRefGoogle Scholar
  43. Zhang, H. (1993) “Treasury Yield Curves and Cointegration,” Applied Economics, 25 (7): 361–367.CrossRefGoogle Scholar

Copyright information

© Sam Hakim and Simon Neaime 2011

Authors and Affiliations

  • Sam Hakim
  • Simon Neaime

There are no affiliations available

Personalised recommendations