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Spread overreaction in international bond markets

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  • Gregory D. Sutton

Abstract

This paper applies the Campbell-Shiller (1987) methodology to a study of the joint behaviour of a three-month and a five-year government yield in the United States, Canada, the United Kingdom, Germany and Japan. The period studied is for most countries the mid-1970s to the third quarter of 1997. The empirical results allow the rejection of the expectations theory of the term structure at high levels of statistical significance in every country except Japan. Furthermore, in every country where the expectations theory fails, the failure of the theory is consistent with the spread overreaction hypothesis of Froot (1989) and Campbell and Shiller (1991). This implies that the departures of long rates from levels predicted by the expectations theory in many major markets cannot be attributed to white noise error terms.

Suggested Citation

  • Gregory D. Sutton, 1998. "Spread overreaction in international bond markets," BIS Working Papers 55, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:55
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    References listed on IDEAS

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    1. Bekaert, Geert & Hodrick, Robert J. & Marshall, David A., 1997. "On biases in tests of the expectations hypothesis of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 44(3), pages 309-348, June.
    2. repec:bla:jfinan:v:44:y:1989:i:2:p:283-305 is not listed on IDEAS
    3. Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1190-1219, December.
    4. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-1088, October.
    5. Hardouvelis, Gikas A., 1994. "The term structure spread and future changes in long and short rates in the G7 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 255-283, April.
    6. John Y. Campbell & Robert J. Shiller, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(3), pages 495-514.
    7. Campbell, John Y & Shiller, Robert J, 1984. "A Simple Account of the Behavior of Long-Term Interest Rates," American Economic Review, American Economic Association, vol. 74(2), pages 44-48, May.
    8. Gregory D. Sutton, 1997. "Is there excess comovement of bond yields between countries?," BIS Working Papers 44, Bank for International Settlements.
    9. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(1), pages 173-224.
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    Cited by:

    1. Didier Cossin & Tomas Hricko & Daniel Aunon-Nerin & Zhijiang Huang, 2002. "Exploring for the Determinants of Credit Risk in Credit Default Swap Transaction Data: Is Fixed-Income Markets’ Information Suffcient to Evaluate Credit Risk?," FAME Research Paper Series rp65, International Center for Financial Asset Management and Engineering.
    2. Ron Lange, 1999. "The Expectations Hypothesis for the Longer End of the Term Structure: Some Evidence for Canada," Staff Working Papers 99-20, Bank of Canada.
    3. Nicolas Rautureau, 2004. "Modèles à changement de régime et test de la théorie des anticipations rationnelles de la structure par terme des taux dintérêt en France," Économie et Prévision, Programme National Persée, vol. 163(2), pages 117-129.
    4. Aronovich, Selmo, 1999. "Country Risk Premium: Theoretical Determinants and Empirical Evidence for Latin American Countries," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 53(4), October.

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