"Expectations Hypotheses Tests"
©
Journal of Finance,
August
2001
Volume: 56
|
Issue: 4
|
Pages: 1357-94
Publication type: Journal article
Research Archive Topic: Capital Markets and Investments, World Business
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.
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