Revisiting the expectations hypothesis of the term structure of interest rates
Harris, Richard D. F.
Journal of Banking and Finance
The expectations hypothesis of the term structure has been decisively rejected by a large empirical literature that spans several decades. In this paper, using a newly constructed dataset of synthetic zero coupon bond yields, we show that evidence against the expectations hypothesis became very much weaker following the widespread acceptance of its empirical failure to describe the behavior of interest rates in the early 1990s. Indeed, in the period 1991-2004, the expectations hypothesis cannot be rejected for most bond maturities. These results are consistent with the idea that asset pricing anomalies tend to disappear once they are widely recognized.
Working paper date May 2008. Final version published in Journal of Banking & Finance c 2010 Elsevier B.V. Available online at http://www.sciencedirect.com/
Journal of Banking & Finance, Vol. 35, Issue 5, May 2011, p. 1202–1212