Structural breaks, parameter uncertainty, and term structure puzzles
We show that uncertainty about parameters of the short rate model can account for the rejections of the expectations hypothesis for the term structure of interest rates. We assume that agents employ Bayes rule to learn parameter values in the context of a model that is subject to stochastic structural breaks. We show that parameter uncertainty also implies that the verdict on the expectations hypothesis varies systematically with the term of the long bond and the particular test employed, in the same way that is found in empirical tests.
Year of publication: |
2011
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Authors: | Bulkley, George ; Giordani, Paolo |
Published in: |
Journal of Financial Economics. - Elsevier, ISSN 0304-405X. - Vol. 102.2011, 1, p. 222-232
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Publisher: |
Elsevier |
Subject: | Change-point Learning Expectations hypothesis |
Saved in:
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