TY - JOUR
T1 - Structural Breaks, Parameter Uncertainty and Term Structure Puzzles
AU - Bulkley, I.G
AU - Paolo, Giordai
PY - 2011/10
Y1 - 2011/10
N2 - 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.
AB - 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.
U2 - 10.1016/j.jfineco.2011.05.009
DO - 10.1016/j.jfineco.2011.05.009
M3 - Article
VL - 102
SP - 222
EP - 232
JO - Journal of Financial Economics
JF - Journal of Financial Economics
SN - 0304-405X
IS - 1
ER -