Testing the Expectations Hypothesis on Corporate Bond Yields

This paper has the purpose of testing the expectations hypothesis of the term structure for two corporate bond yields. A new test is developed based on an ARIMA data generation process of the short rate, and on the derivation of a relation between the change in the long rate and revisions of expectations of future short rates. The paper makes the point that adjustment of the change in the long rate to short rate news does not occur instantaneously but is dynamic over time. For this reason a polynomial distributed lag of the rate news, which provides support to the expectations hypothesis, is estimated. This is quite remarkable because the liquidity, term, and default risk premiums are left out of the analysis.


Issue Date:
2010-04
Publication Type:
Journal Article
PURL Identifier:
http://purl.umn.edu/143265
Published in:
Review of Applied Economics, Volume 06, Number 1-2
Page range:
1-11
Total Pages:
11
JEL Codes:
E43; G12; C22
Series Statement:
Vol.6
No.1-2




 Record created 2017-04-01, last modified 2017-08-26

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