Tests of the Expectations Hypothesis: Resolving the Campbell-Shiller Paradox
نویسنده
چکیده
One of the more puzzling results in the expectations hypothesis (EH) testing literature is the Campbell-Shiller paradox. In an influential paper, Campbell and Shiller (1991) found that “the slope of the term structure almost always gives a forecast in the wrong direction for the short-term change in the yield on the longer bond, but gives a forecast in the right direction for long-term changes in short rates.” This paper provides an econometric resolution to the Campbell-Shiller paradox. Specifically, it shows that, by their construction, these tests can generate results consistent with the Campbell-Shiller paradox if the EH does not hold—whatever the reason. Monte Carlo experiments confirm that this explanation can account for Campbell and Shiller’s paradoxical results for most pairings of short-term and long-term rates considered. JEL Classification: E40, E52
منابع مشابه
The Expectations Hypothesis of the Term Structure
Using a number of short-term maturities and monthly data, 1984-1997, we provide a number of tests of the expectations hypothesis (EH) of the term structure. The paper draws on cointegration techniques and the methodological approach of Campbell and Shiller (1987,1991). On balance our results lend support to the EH and are broadly consistent with recent findings for the UK, but are in sharp cont...
متن کاملTime Varying Term Premia and Traditional Hypotheses about the Term Structure
Empirical evidence of time varying term premia in bond returns is frequently interpreted as evidence against the Expectations Hypothesis. This paper shows that the Expectations Hypothesis can actually imply time varying term premia if the time frame for which the Expectations Hypothesis holds differs from the return measurement period. Furthermore, many of the properties of these term premia ar...
متن کاملOn a Numerical and Graphical Technique for Evaluating Some Models Involving Rational Expectations
Campbell and Shiller (1987) proposed a graphical technique for the present value model which consists of plotting the spread and theoretical spread as calculated from the cointegrated vector autoregressive model. We extend these techniques to a number of rational expectation models and give a general definition of spread and theoretical spread. The main results are the asymptotic distributions ...
متن کاملTesting for Stochastic Non- Linearity in the Rational Expectations Permanent Income Hypothesis
The Rational Expectations Permanent Income Hypothesis implies that consumption follows a martingale. However, most empirical tests have rejected the hypothesis. Those empirical tests are based on linear models. If the data generating process is non-linear, conventional tests may not assess some of the randomness properly. As a result, inference based on conventional tests of linear models can b...
متن کاملInterpreting Cointegrated Models
Error-correction models for cointegrated economic variables are commonly interpreted as reflecting partial adjustment of one variable to another. We show that error-correction models may also arise because one variable forecasts another. Reduced-form estimates of error-correction models cannot be used to distinguish these interpretations. In an application, we show that the estimated coefficien...
متن کامل