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The Expectations Hypothesis of the Term Structure: The UK Interbank Market

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  • Cuthbertson, Keith

Abstract

Using a high-quality weekly data set, the author provides several tests of the expectations hypothesis using the vector autoregression and cointegration methodologies, for several maturities between one-week and twelve-months, for the U.K. interbank market. On the basis of the Johansen cointegration analysis, there appears to be a 'break' in the term structure when both the six-month and twelve-month maturities are included as a pair. The latter may be due to either the presence of liquidity constraints or market segmentation or a time varying term premium, all of which would invalidate the assumptions underlying the expectations hypothesis. The author provides some tentative explanations of these diverse results. Copyright 1996 by Royal Economic Society.

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  • Cuthbertson, Keith, 1996. "The Expectations Hypothesis of the Term Structure: The UK Interbank Market," Economic Journal, Royal Economic Society, vol. 106(436), pages 578-592, May.
    • Handle: RePEc:ecj:econjl:v:106:y:1996:i:436:p:578-92
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