"Peso Problem" Explanations for Term Structure Anomalies / Geert Bekaert, Robert J. Hodrick, David A. Marshall.

Format:

Book

Author/Creator:

Bekaert, Geert.

Contributor:

National Bureau of Economic Research.

Hodrick, Robert J.

Marshall, David A.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6147.

NBER working paper series no. w6147

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1997.

Summary:

We examine the empirical evidence on the expectations hypothesis of the term structure of interest rates in the United States, the United Kingdom, and Germany using the Campbell-Shiller (1991) regressions and a vector-autoregressive" methodology. We argue that anomalies in the U.S. term structure, documented by Campbell and Shiller (1991), may be due to a generalized peso problem in which a high-interest rate regime occurred less frequently in the sample of U.S. data than was rationally anticipated. We formalize this idea as a regime-switching model of short-term interest rates estimated with data" from seven countries. Technically, this model extends recent research on regime-switching models with state-dependent transitions to a cross-sectional setting. Use of the small sample distributions generated by the regime-switching model for inference considerably weakens the evidence against the expectations hypothesis, but it remains somewhat implausible that our data-generating process produced the U.S. data. However, a model that combines moderate time-variation in term premiums with peso-problem effects is largely consistent with term structure data from the U.S., U.K., and Germany.

Notes:

Print version record

August 1997.