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Validity of the Expectations Hypothesis of the Term Structure of Interest Rates: The Case of Saudi Arabia

Author

Listed:
  • Harrathi Nizar

    (King Saud University, College of Business Administration, P.O. Box 71115, 11587, Riyadh, Saudi Arabia)

  • Alhoshan Hamed M.

    (King Saud University, College of Business Administration, P.O. Box 71115, 11587, Riyadh, Saudi Arabia)

Abstract

We examine and test the validity of the expectation hypothesis of the term structure (EHTS) of interest rates in Saudi Arabia using the traditional single equation approach, Campbell and Shiller methodology, Error Correction Model, and monthly data over the period June 1983 to December 2014. The results of the single equation approach indicate that the test of validity of the expectation hypothesis cannot be rejected for all maturities. We also find that the validity of the EHTS of interest rates is supported through the stationarity of the term spreads between short- and long-term interest rates. Moreover, the cointegration test reveals the existence of a cointegration relationship between short- and long-term interest with (1−1)$\left(1-1\right)$ cointegrating vector, suggesting the validity EHTS of interest rates. Policy implications based on the empirical results suggest that the transparency of monetary policy in Saudi Arabia and the effective role of the Saudi Arabian Monetary Authority (SAMA) in conducting monetary policy increase the predictive power of market participants of future movements of short-term interest rates.

Suggested Citation

  • Harrathi Nizar & Alhoshan Hamed M., 2020. "Validity of the Expectations Hypothesis of the Term Structure of Interest Rates: The Case of Saudi Arabia," Review of Middle East Economics and Finance, De Gruyter, vol. 16(1), pages 1-18, April.
    • Handle: RePEc:bpj:rmeecf:v:16:y:2020:i:1:p:18:n:1
    DOI: 10.1515/rmeef-2019-0009
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    More about this item

    Keywords

    term structure of interest rates; expectations hypothesis; Campbell and Shiller methodology; cointegration; vector autoregression;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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