Skip to main content
Article thumbnail
Location of Repository

Testing the expectations theory of the term structure of interest rates in threshold models

By Michael P. Clements and Ana Beatriz C. (Ana Beatriz Camatari) Galvão


We test the expectations theory of the term structure of U.S. interest rates in nonlinear systems. These models allow the response of the change in short rates to past values of the spread to depend upon the level of the spread. The nonlinear system is tested against a linear system, and the results of testing the expectations theory in both models are contrasted. We find that the results of tests of the implications of the expectations theory depend on the size and sign of the spread. The long maturity spread predicts future changes of the short rate only when it is high

Topics: HB
Publisher: Cambridge University Press
Year: 2003
OAI identifier:

Suggested articles


  1. (1992). A cointegration analysis of Treasury bill yields. doi
  2. (2001). A Comparison of Tests of Nonlinear Cointegration with an Application to the Predictability of US Interest Rates Using the Term Structure. Mimeo, doi
  3. (1998). A framework for economic forecasting. doi
  4. (1998). A re-examination of the rational expectations hypothesis of the term structure: Reconciling the evidence from long-run and short-run tests. doi
  5. (1997). Estimating multiple breaks one at a time. doi
  6. (1999). Explaining the increased variability in long-term interest rates. Federal Reserve Bank of Richmond, Economic Quarterly 85, 71–96. APPENDIX A To evaluate the RHS of (10), note that
  7. (1995). Federal reserve interest rate targetting, rational expectations, and the term structure. doi
  8. (1998). For large k, the term in Rt−1 is approximately irΓ 2(I−Γ)−1Rt−1, because Γ k−1 0, and jΓ j+1 → 0 [see, e.g., Ericsson and Marquez
  9. (1996). Index arbritage and nonlinear dynamics between the SP500 futures and cash.
  10. (1996). Inference when a nuisance parameter is not identified under the null hypothesis. doi
  11. (1996). Martens,M.,Kofman,P.,&T.C.F.Vorst(1998)Athresholderror-correctionmodelforintradayfutures and index returns.
  12. (1996). Modeling the conditional distribution of interest rates as a regime-switching process. doi
  13. (1993). Modelling Nonlinear Economic Relationships.
  14. (2000). Nonlinear error-correction models for interest rates in the Netherlands. In doi
  15. (1996). Nonlinear interest rate dynamics and implications for the term structure. doi
  16. (1988). Rational-expectations econometric analysis of changes in regime. An investigation of the term structure of interest rates.
  17. (1999). Smooth Transition Models: Extensions and Outlier Robust Inference.
  18. (1998). Testing and modeling multivariate threshold models. doi
  19. (2000). Testing for linearity. doi
  20. (1994). Testing the term structure of interest rates using a stationary vector autoregression with regime switching. doi
  21. (1986). The changing behaviour of the term structure of interest rates. doi
  22. (1997). The performance of alternative forecasting methods for SETAR models. doi
  23. (1994). The term structure spread and future changes in long and short rates in the G7 countries. doi
  24. (1997). Threshold cointegration. doi
  25. (1997). Transaction costs and non-linear adjustment towards equilibrium in the US Treasury bill market. doi

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.