Investigating the expectation hypothesis and the risk premium dynamics: new evidence for Brazil

  • João F. CaldeiraEmail author


We re-examine the validity of the expectation hypothesis (EH) of the term structure for the Brazilian fixed income market, using data from January 2000 to June 2017. Furthermore, we investigated the out-of-sample predictability of bond excess returns by means of common factors extracted from a cross-section of Brazilian macro-variables and zero-coupon interest rates. The EH is rejected throughout the term structure examined on the basis of the statistical tests across the entire maturity spectrum considered. Our results confirm previous findings, mostly obtained for developed markets, that a linear combination of forward rates and macroeconomic factors can explain a substantial portion of movements in bonds excess returns, contributing novel and up-to-date evidence from a large and dynamic emerging bond market, such as Brazil. Furthermore, we find that the factor extracted from a large panel of macroeconomic variables generates significant gains in forecasting bond excess returns relative to yield curve information.


Expectation hypothesis Bond risk premia Factor models Excess return predictability Out-of-sample forecasts 

JEL Classification

C53 E43 G17 



João F. Caldeira gratefully acknowledges support provided by CNPq under Grants 430192/2016-9 and 306886/2018-9.

Compliance with ethical standards

Conflict of interest

João F. Caldeira declares that he has no conflict of interest.

Ethical approval

This article does not contain any studies with human participants performed by any of the authors.


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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Department of EconomicsUniversidade Federal do Rio Grande do Sul & CNPqPorto AlegreBrazil

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