The Rational Expectations Hypothesis of the Term Structure at the Polish Interbank Market

Maria Blangiewicz; Paweł Miłobędzki

doi:https://doi.org/10.59139/ps.2009.01.2

Maria Blangiewicz Uniwersytet Gdański , Paweł Miłobędzki Uniwersytet Gdański Przegląd Statystyczny. Statistical Review, vol. 56, 2009, 1, pages: 23-39 Published online: 31 March 2009 DOI https://doi.org/10.59139/ps.2009.01.2

547 Views 43 Downloads

ARTICLE

(English) PDF

ABSTRACT

We use a three-variable VAR including the yield spread, the change in the short rate and the excess holding period yield to test for the validity of the rational expectations hypothesis (REH) at the Polish interbank market. In doing so we utilize the set of monthly sampled WIBORs (Warsaw Interbank Offered Rates) for maturities of 1, 3, 6, 9 and 12 months from the period January 1999-December 2007. Although the yield spread Granger-causes future changes in the short rate for all maturities the other testing results are somewhat ambiguous. We find the restrictions set on the VAR that the one-period excess holding period return is not time varying should be rejected for all maturities. So should be the restrictions stating the actual spread equals the theoretical spread, except for 12 month WIBOR. Nevertheless, the estimates of conventional VAR metrics such that correlation coefficients between the actual and the theoretical spread and their variance ratios to some extent support the REH in its pure form (PREH). The first are all very close to unity and the latter are less than two standard deviations from unity for 3 month maturity. The conclusions in favour of the PREH for 9 and 12 month maturities are reached upon the bootstrapping experiment in which we have estimated the 95 per cent confidence intervals for the variance ratios. The estimates of the other VAR metrics suggest that a relatively large piece of variation in the unexpected return is due to news about future short rates and not due to news about the future average term premium.

KEYWORDS

term structure of interest rates, rational expectations hypothesis, time-varying term premia, VAR, Polish interbank market

REFERENCES

[1] Bataa E., Kim D.H., Osborn D.R., [2006], Does Spread Really Predict the Short Rate? Explaining Empirical Anomalies in the Expectations Theory, Centre for Growth and Business Cycle Research, Discussion Papers Series, No. 84.

[2] Blangiewicz M., Miłobędzki P., [2008], Is there a nonlinear mean reversion in the term structure of interest rates at the Polish interbank market?, [in:] Soares J.O, Pina J., Catalao-Lopes M. (eds.), New Developments in Financial Modeling, Cambridge Scholar Publishing, pp. 77-94.

[3] Blangiewicz M., Miłobędzki P., The term structure of interest rates at the Polish interbank market. A VAR approach, [in] Milo W., Wdowiński P. (eds.), Forecasting Financial Markets. Theory and Applications, Wydawnictwo Uniwersytetu Łódzkiego, forthcoming.

[4] Cheung Y.-W., Lai K.S., [1995], Lag Order and Critical Values of the Augmented Dickey-Fuller Test, „Journal Business & Economic Statistics”, Vol. 13, No. 3, pp. 277-280.

[5] Campbell J.Y., Shiller R.J., [1987], Cointegration and Tests of Present Value Models, „Journal of Political Economy”, Vol. 95, pp. 1062-1088.

[6] Campbell J.Y., Shiller R.J., [1991], Yield Spreads and Interest Rates Movements: A Bird’s Eye View, „Review of Economic Studies”, Vol. 58, pp. 495-514.

[7] Cuthbertson K., [1996], The Expectations Hypothesis of The Term Structure: The UK Interbank Market, „Economic Journal”, Vol. 106, pp. 578-592.

[8] Cuthbertson K., Hayes S., Nitzsche D., [1996], The Behaviour of Certificate of Deposit Rates in the UK, Oxford Economic Papers, Vol. 48, pp. 397-414.

[9] Cuthbertson K., Hayes S., Nitzsche D., [2000], Are German Money Market Rates Well Behaved?, „Journal of Economic Dynamics & Control”, Vol. 24, pp. 347-360.

[10] Cuthbertson K., Bredin D., [2001], Risk Premia and Long Rates in Ireland, Journal of Forecasting, Vol. 20, pp. 391-403.

[11] Cuthbertson K., Nitzsche D., [2003], Long Rates, Risk Premia and Over-reaction Hypothesis, „Economic Modelling”, Vol. 20, pp. 417-435.

[12] Cuthbertson K., Nitzsche D., [2004], Quantitative Financial Economics: Stocks, Bonds & Foreign Exchange, Wiley.

[13] Davidson R., MacKinnon J.G., [1993], Estimation and Inference in Econometrics, Oxford University Press.

[14] Dickey D.A., Fuller W.A., [1979], Distribution of the Estimators for Autoregressive Time Series with a Unit Root, „Journal of the American Statistical Association”, Vol. 74, pp. 427-431.

[15] Elliot G., Rothenberg T.J., Stock J.H., [1996], Efficient Tests for an Autoregressive Unit Root, „Econometrica”, Vol. 64, pp. 813-836.

[16] Engsted T., Tanggaard C., [1997], The Predictive Power of Yield Spreads for Future Interest Rates: Evidence from the Danish Term Structure, „Scandinavian Journal of Economics”, Vol. 1, pp. 145-159.

[17] Hobijn B., Franses P., Ooms M., [1998], Generalizations of the KPSS-test for Stationarity, „Econometric Institute”, Erasmus University Rotterdam, Report 9802/A.

[18] Hurn A.S., Moody T., Muscatelli V.A., [1995], The Term Structure of Interest Rates in the London Interbank Market, Oxford Economic Papers, Vol. 47, pp. 418-436.

[19] Johansen S., [1988], Statistical Analysis of Cointegrating Vectors, „Journal of Economic Dynamics and Control”, Vol. 12, pp. 231-254.

[20] Johansen S., [1991], Estimation and hypothesis testing of cointegrating vectors in Gaussian vector autoregressive models, „Econometrica”, Vol. 59, pp. 1551-1580.

[21] King R.G., Kurmann A., [2002], Expectations and the Term Structure of Interest Rates: Evidence and Implications, Federal Reserve Bank of Richmond Quarterly, Vol. 88, No. 4, pp. 49-95.

[22] Konstantinou P.T., [2005], The Expectations Hypothesis of the Term Structure. A Look at the Polish Interbank Market, Emerging Markets Finance and Trade, Vol. 41, No. 3, pp. 70-91.

[23] Kwiatkowski D., Phillips P.C.B., Schmidt P., Shin Y., [1992], Testing the null hypothesis of stationarity against the alternative of a unit root, „Journal of Econometrics”, Vol. 54, pp. 159-178.

[24] Luetkepohl H., [2005], New Introduction to Multiple Time Series Analysis, Springer.

[25] McCulloch J., Kwon H., [1993], US Term Structure Data, 1947-1991, Ohio State University Working Paper, No. 93-96.

[26] Tzavalis E., [2003], The term premium and the puzzles of the expectations hypothesis of the term structure, „Economic Modelling”, Vol. 21, pp. 73-93.

[27] Tzavalis E., Wickens M., [1998], A Re-Examination of the Rational Expectations Hypothesis of the Term Structure: Reconciling the Evidence from Long-Run and Short-Run Tests, „International Journal of Finance and Economics”, Vol. 3, pp. 229-239.