Abstract
This paper estimates the predictive power of the spread for short rate changes in a regression framework allowing for ARCH-M effects, which should take into account time variation in the term premium. Monthly data for one and three months Euro interest rates covering nine currencies and the period 1979/11 — 91/2 indicate that the spread has clearly predictive power for one-months interest rates as implied by the expectations theory, but the parametric restriction of the expectations theory has to be rejected in a statistical test in most cases.
Earlier versions of this paper were presented at the Conference on Financial Market Econometrics, Mannheim, February 1992 and the Annual Congress of the European Economic Association, Dublin, August 1992. Helpful comments of participants of both meetings are gratefully acknowledged.
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© 1994 Physica-Verlag Heidelberg
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Kugler, P. (1994). The Expectation Hypothesis and Interest Rate Volatility on the Euromarket: Some Empirical Results. In: Kaehler, J., Kugler, P. (eds) Econometric Analysis of Financial Markets. Studies in Empirical Economics. Physica-Verlag HD. https://doi.org/10.1007/978-3-642-48666-1_9
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DOI: https://doi.org/10.1007/978-3-642-48666-1_9
Publisher Name: Physica-Verlag HD
Print ISBN: 978-3-642-48668-5
Online ISBN: 978-3-642-48666-1
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