"'Peso Problem' Explanations for Term Structure Anomalies"

Geert Bekaert, Robert Hodrick, David Marshall

© Journal of Monetary Economics, October 2001
Volume: 48 | Issue: 2 | Pages: 241-70

Publication type: Journal article

Research Archive Topic: Business Economics and Public Policy, World Business

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.

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