Robert Hodrick

'Peso Problem' Explanations for Term Structure Anomalies

Coauthor(s): Geert Bekaert, David Marshall.

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Abstract:
We investigate whether term structure anomalies in U.S. data may be due to a generalized peso problem, in which a high-interest-rate regime occurred less frequently in the U.S. sample than was rationally anticipated. We formalize this idea by estimating a regime-switching model of short-term interest rates with data from seven countries. Under the small-sample distributions generated by the model, the expectations hypothesis is rejected. When we allow moderate time variation in term premiums, the term-premium dynamics interact with peso-problem effects to generate small-sample distributions more consistent with the data. Nonetheless, our model cannot fully account for U.S. term structure anomalies.

Source: Journal of Monetary Economics
Exact Citation:
Bekaert, Geert, Robert Hodrick, and David Marshall. "'Peso Problem' Explanations for Term Structure Anomalies." Journal of Monetary Economics 48, no. 2 (October 2001): 241-70.
Volume: 48
Number: 2
Pages: 241-70
Date: 10 2001
Descriptors: Financial Economics