Weakness in the expectations hypothesis of the term structure interest rates

Abstract EN

In this paper, we present the empirical weakness of the expectation hypothesis of the term structure interest rates (EHTS).

The related empirical study on the validity of EHTS indicates that there are potential reasons of the rejection of the EHTS related to time-varying risk premium and the irrational expectation.

Nevertheless, many studies provide evidence of structural breaks in the term structure interest rates and conclude that the omitted structural break leads to the bias estimated parameters of the long run relationship between short and long rate and the rejection of the expectation hypothesis of the term structure interest rates.