Skip to content

Can behavioral biases explain the rejections of the expectation hypothesis of the term structure of interest rates?

Research output: Contribution to journalArticle

Original languageEnglish
Pages (from-to)179-193
Number of pages15
JournalJournal of Banking and Finance
Volume58
Early online date27 Apr 2015
DOIs
DateAccepted/In press - 21 Mar 2015
DateE-pub ahead of print - 27 Apr 2015
DatePublished (current) - Sep 2015

Abstract

We test whether the rejections of the expectations hypothesis of the term structure of interest rates can be explained by two behavioral biases: the law of small numbers and conservatism. We use the term structure to decompose excess bond returns into components related to expectation errors and expectation revisions, enabling a direct test of behavioral models using the expectations of market participants. We find systematic patterns in expectation errors, and expectation revisions, that are consistent with these two biases. Moreover, we show that our
results are unlikely to be driven by a time-varying risk premium.

    Research areas

  • Behavioral bias, Conservatism, Law of small numbers, Representativeness, Expectations hypothesis of the term structure of interest rates

Download statistics

No data available

Documents

Documents

  • JBF accepted draft Behavioural Bonds version05o-ACCEPTED

    Rights statement: This is the author accepted manuscript (AAM). The final published version (version of record) is available online via Elsevier at http://www.sciencedirect.com/science/article/pii/S0378426615000953. Please refer to any applicable terms of use of the publisher.

    Accepted author manuscript, 477 KB, PDF document

    Licence: CC BY-NC-ND

DOI

View research connections

Related faculties, schools or groups