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Journal of Banking & Finance Vol. 32 No. 4 2008

Further analysis of the expectations hypothesis using very short-term rates

Craig Brown1; Ken B. Cyree2,3; Mark D. Griffiths4; Drew B. Winters5,6

1 Deloitte (United States) · 2 American Bankers Association · 3 University of Mississippi · 4 Miami University · 5 Federal Reserve Bank of St. Louis · 6 Texas Tech University

Abstract

Longstaff [Longstaff, F., 2000. The term structure of very short-term rates: new evidence for the expectations hypothesis. Journal of Financial Economics 58, 397–415] finds support for the expectations hypothesis at the very short end of the repurchase agreement (repo) term structure while other studies find calendar-time-based regularities cause rejection of the expectations hypothesis. Using Longstaff’s methods on a sample of repo rates that pre-dates Longstaff’s sample, we reject the expectations hypothesis for every maturity. The pre-Longstaff-sample repo data comes from a time period where the behavior of short-term interest rates is similar to the long-run average behavior of short-term interest rates. Our results imply that expectations hold when rates are less volatile and/or that we may be entering a period of lower volatility.

DOI
10.1016/j.jbankfin.2007.04.026
Volume
32
Issue
4
Pages
600-613
Language
en
Sources
openalex crossref bibtex:phds-export.bib

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