Revisiting the expectations hypothesis of the term structure of interest rates

Abstract

The expectations hypothesis of the term structure has been decisively rejected in a large empirical literature that spans several decades. In this paper, using a newly constructed dataset of synthetic zero-coupon bond yields, we show that evidence against the expectations hypothesis is substantially weaker in data generated after the widespread publicity of its failure. These results are consistent with the idea that asset pricing anomalies tend to disappear once they are widely recognized.Expectations hypothesis of the term structure of interest rates Forward yields Yield spreads Campbell and Shiller tests Vector autoregression