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Studies in Nonlinear Dynamics & Econometrics

Ed. by Mizrach, Bruce

IMPACT FACTOR 2017: 0.855

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Source Normalized Impact per Paper (SNIP) 2017: 0.894

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Volume 2, Issue 4


Testing the Expectations Theory of the Term Structure of Interest Rates Using Model-Selection Methods

John C. Chao / Chaoshin Chiao
Published Online: 1998-01-01 | DOI: https://doi.org/10.2202/1558-3708.1032

In this paper, we propose a model-selection approach to testing the expectations theory of the term structure of interest rates. Our method is based on the posterior information criterion (PIC) developed and analyzed by Phillips and Ploberger (1994, 1996) and extended to provide order estimation of cointegrating rank by Chao and Phillips (1997). This methodology has the advantage that issues of order selection—i.e., the determination of lag length and cointegrating rank in a vector autoregression—and hypothesis testing are treated within the same framework. Applying our procedure to interest-rate data from the International Financial Statistics, we find the expectations theory to be inconsistent with the data.

This article offers supplementary material which is provided at the end of the article.

Keywords: cointegration; expectations theory; integrated processes; model selection; PIC; term structure of interest rates; vector autoregression

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Published Online: 1998-01-01

Citation Information: Studies in Nonlinear Dynamics & Econometrics, Volume 2, Issue 4, ISSN (Online) 1558-3708, DOI: https://doi.org/10.2202/1558-3708.1032.

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