A Behavioral Approach of The Expectations Hypothesis of the Term Structure of Interest Rates

The purpose of this study is to analyze the consequences of relaxing agent's rationality assumption on the term structure of interest rates formation process. We propose a theoretical model by applying some behavioral finance theory to the term structure of interest rate, including the prospect theory, anchoring and overconfidence. The theoretical model proposed was tested on US T-Bill secondary market data. The results show that agents are more preoccupied by interest rate variation direction in their forecasting than it absolute level. Nevertheless, the long rate can be considers as a portfolio of shorts rates but with different weights depending on the behavior of market operators. For US, although the future variation of interest rates is strongly predictable, operators are “anchoring” themselves to the actual level of interest rate, overweighting it value. It also appears that loose aversion as well can explain the shape of the yield curve at a given time