Structural Breaks, Parameter Uncertainty and Term Structure Puzzles

I.G Bulkley, Giordai Paolo

Research output: Contribution to journalArticle (Academic Journal)

4 Citations (Scopus)

Abstract

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.
Original languageEnglish
Pages (from-to)222 - 232
Number of pages11
JournalJournal of Financial Economics
Volume102
Issue number1
DOIs
Publication statusPublished - Oct 2011

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