Journal of Finance Vol. 53 No. 1 1998
Around and Around: The Expectations Hypothesis
Abstract
We show how to construct models of the term structure of interest rates in which the expectations hypothesis holds. McCulloch (1993) presents such a model, thereby contradicting an assertion by Cox, Ingersoll, and Ross (1981), but his example is Gaussian and falls outside the class of finite-dimensional Markovian models. We generalize McCulloch's model in three ways: (i) We provide an arbitrage-free characterization of the unbiased expectations hypothesis in terms of forward rates; (ii) we extend this characterization to a whole class of expectations hypotheses; and (iii) we show how to construct finite-dimensional Markovian and non-Gaussian examples.
- DOI
- https://doi-org.proxy.lib.uiowa.edu/10.1111/0022-1082.145490
- Volume
- 53
- Issue
- 1
- Pages
- 365-383
- Sources
- bibtex:phds-export.bib