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Term Structure Anomalies: Term Premium or Peso problem?

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  • JARDET, C.

Abstract

The goal of this paper is to develop a test for the relative importance of the time-varying term premium and the peso-problem for rejection of the Expectation Hypothesis of the Term Structure (EHTS). Our reasoning is based on a term structure model that allows for both phenomena simultaneously. If we assume that only one regime is observed ex-post, we can estimate all the information we need to evaluate distortions generated by both hypotheses. We can also test the presence of a peso-problem. Firstly we find that a peso-problem might explain rejection of the EHTS in Germany and the United Kingdom after the European exchange rate crisis. Secondly, we show that this explanation appears inappropriate to explain the EHTS failure in the United States.

Suggested Citation

  • Jardet, C., 2006. "Term Structure Anomalies: Term Premium or Peso problem?," Working papers 143, Banque de France.
    • Handle: RePEc:bfr:banfra:143
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    3. Koukouritakis, Minoas, 2013. "Expectations hypothesis in the context of debt crisis: Evidence from five major EU countries," Research in Economics, Elsevier, vol. 67(3), pages 243-258.
    4. Johannes Fedderke & Neryvia Pillay, 2010. "A Rational Expectations Consistent Measure of Risk: Using Financial Market Data from a Middle Income Context," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 72(6), pages 769-793, December.
    5. Cathy Yi-Hsuan Chen & Thomas C. Chiang, 2017. "Surprises, sentiments, and the expectations hypothesis of the term structure of interest rates," Review of Quantitative Finance and Accounting, Springer, vol. 49(1), pages 1-28, July.
    6. Minoas Koukouritakis, 2010. "Structural breaks and the expectations hypothesis of the term structure: evidence from Central European countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 145(4), pages 757-774, January.
    7. I Doun Kuo, 2017. "Irrationality and Term Structure Anomaly," Proceedings of Economics and Finance Conferences 4507033, International Institute of Social and Economic Sciences.
    8. Chen, Cathy Yi-Hsuan & Kuo, I-Doun & Chiang, Thomas C., 2014. "What explains deviations in the unbiased expectations hypothesis? Market irrationality vs. the peso problem," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 30(C), pages 172-190.

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    More about this item

    Keywords

    Expectation theory of the term structure ; Peso problem ; Time varying term premium.;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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