What explains deviations in the unbiased expectations hypothesis? Market irrationality vs. the peso problem

Chen, C. Y.-H., Kuo, I.-D. and Chiang, T. C. (2014) What explains deviations in the unbiased expectations hypothesis? Market irrationality vs. the peso problem. Journal of International Financial Markets, Institutions and Money, 30, pp. 172-190. (doi:10.1016/j.intfin.2014.01.009)

Chen, C. Y.-H., Kuo, I.-D. and Chiang, T. C. (2014) What explains deviations in the unbiased expectations hypothesis? Market irrationality vs. the peso problem. Journal of International Financial Markets, Institutions and Money, 30, pp. 172-190. (doi:10.1016/j.intfin.2014.01.009)

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Abstract

Evidence from this study suggests that investor sentiment and the peso problem play a significant role in explaining expectation errors, rejecting the unbiased expectation hypothesis (UEH). The deviation of the UEH for long-term rates is mainly attributable to expectation errors, whereas the deviation of short-term rates is tied to the term premium. We decompose expectation errors and find that irrationality is more apparent in crisis periods, and the rational component becomes an influential factor in tranquil periods.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Chen, Professor Cathy Yi-Hsuan
Authors: Chen, C. Y.-H., Kuo, I.-D., and Chiang, T. C.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Journal Name:Journal of International Financial Markets, Institutions and Money
Publisher:Elsevier BV
ISSN:1042-4431
ISSN (Online):1873-0612
Published Online:28 February 2014

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