SHERP

A Test of the Rational Expectations Model of the Term Structure of Interest Rates

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Authors
Kim, YongJin
Issue Date
1990
Publisher
Seoul Journal of Economics
Citation
Seoul Journal of Economics 3 (No. 2 1990): 179-204
Keywords
rational expectations model; Measurement Error Model; R.E. Hypothesis
Abstract
Most tests of the rational expectations hypothesis have been
rejected. The purpose of this paper is to characterize the
aspects of the rational expectations model of the term structure
which contribute to the rejection, rather than to merely provide
testing statistics. One of the important characterizations I
found is that the long term rate reacts rationally with respect
to the unexpected movement of the short term rate irrespective
of whether this movement is temporary or permanent over all of
the studied subperiods, including 1890-1913. Secondly, the innovation
to the variable term premium is orthogonal to the unexpected
movement of the short term rate. Lastly, the rational
expectations model does not hold over the long run movements,
but does over the short run movements.
ISSN
1225-0279
Language
English
URI
http://hdl.handle.net/10371/893
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College of Social Sciences (사회과학대학)Institute of Economics Research (경제연구소)Seoul Journal of EconomicsSeoul Journal of Economics vol.03(2) (Summer 1990)
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