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Where (and by How Much) Does a Theory Break Down? With an Application to the Expectation Hypothesis

In: Essays in Honor of M. Hashem Pesaran: Panel Modeling, Micro Applications, and Econometric Methodology

Author

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  • Karim M. Abadir
  • Christina Atanasova

Abstract

The authors provide new evidence in favor of the expectation hypothesis (EH) as a long-run theory of the term structure of interest rates. Using nonparametric techniques first, the authors show that the results of conventional tests that reject EH are strongly affected by the presence of extreme observations – only a handful in the case of longer maturities. The authors then provide a new general methodology that determines the number of outliers causinganytheory to fail, and their approach quantifies the extent of this failure.

Suggested Citation

  • Karim M. Abadir & Christina Atanasova, 2022. "Where (and by How Much) Does a Theory Break Down? With an Application to the Expectation Hypothesis," Advances in Econometrics, in: Essays in Honor of M. Hashem Pesaran: Panel Modeling, Micro Applications, and Econometric Methodology, volume 43, pages 255-267, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:aecozz:s0731-90532021000043b011
    DOI: 10.1108/S0731-90532021000043B011
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    More about this item

    Keywords

    Expectation hypothesis; term structure of interest rates; Peso problem; outliers; nonparametric estimation; recursive estimation; E4; G12; C12;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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