Robert Hodrick

Expectations Hypotheses Tests

Coauthor(s): Geert Bekaert.

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Abstract:
We investigate the expectations hypotheses of the term structure of interest rates and of the foreign exchange market using vector autoregressive methods for U.S. dollar, Deutsche mark, and British pound interest rates and exchange rates. We examine Wald, Lagrange multiplier, and distance metric tests by iterating on approximate solutions that require only matrix inversions. Bias-corrected, constrained VARs provide Monte Carlo simulations. Wald tests grossly overreject the null, Lagrange multiplier tests slightly underreject, and distance metric tests overreject. A common interpretation emerges from the small sample statistics. The evidence against the expectations hypotheses is much less strong than under asymptotic inference.

Source: Journal of Finance
Exact Citation:
Bekaert, Geert, and Robert Hodrick. "Expectations Hypotheses Tests." Journal of Finance 56, no. 4 (August 2001): 1357-94.
Volume: 56
Number: 4
Pages: 1357-94
Date: 8 2001
Descriptors: Macroeconomics and Monetary Economics Financial Economics