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

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Authors
Kim, YongJin
Issue Date
1990-04
Publisher
Institute of Economic Research, Seoul National University
Citation
Seoul Journal of Economics, Vol.3 No.2, pp. 179-204
Keywords
rational expectations modelMeasurement Error ModelR.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
https://hdl.handle.net/10371/893
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College of Social Sciences (사회과학대학)Institute of Economics Research (경제연구소)Seoul Journal of Economics (SJE)Seoul Journal of Economics vol.03(2) (Summer 1990)
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