Nested Tests of Alternative Term-Structure Theories / Edward J. Kane.

Format:

Book

Author/Creator:

Kane, Edward J.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w0639.

NBER working paper series no. w0639

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1981.

Summary:

Controversies in term-structure theory center around the existence and variability of term premia in securities yields. In this paper, the term premium on a default-free n-period bond is defined as the difference between its observable yield to maturity and the average expected per-annum rate of return on an n-period strip of rollover investments in one-period bonds. To test alternative term-structure theories without introducing ex post proxies for expectational variables, this paper uses a set of cross-section interest-rate forecasts collected jointly with Burton Malkiel of Princeton University from a population of large institutional lenders at four different phases of a single interest-rate cycle. Statistical tests strongly confirm the existence of nonzero term premia at each survey date, thereby rejecting the pure-expectations theory of the term structure. Additional tests are unable to reject restrictions implied by the liquidity-premium hypothesis that term premia should be positive and increase with maturity. Finally, contrary to the martingale hypothesis, ex ante term-premium data vary significantly overtime and show a positive association with the level of interest rates.

Notes:

Print version record

March 1981.