Surprises, sentiments, and the expectations hypothesis of the term structure of interest rates

Chen, C. Y.-H. and Chiang, T. C. (2017) Surprises, sentiments, and the expectations hypothesis of the term structure of interest rates. Review of Quantitative Finance and Accounting, 49(1), pp. 1-28. (doi:10.1007/s11156-016-0584-y)

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Abstract

This study shows that time-varying coefficients in the term structure of interest rates equation are correlated with the time-varying term premiums (TVTP) and expectation error (EE). Consistent with Froot (J Finance 44:283–305, 1989), TVTP and EE are the main factors that cause variations in the expectations hypothesis. Once the TVTP and the EE are appropriately incorporated into the model, the GARCH-M evidence fades away. This study documents that investors’ sentiment and macroeconomic surprises are the main driving forces behind the TVTP and EE. Evidence of significant sentiment and its interacting with macroeconomic surprises shed some light on the bias due to behavioral variations.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Chen, Professor Cathy Yi-Hsuan
Authors: Chen, C. Y.-H., and Chiang, T. C.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Journal Name:Review of Quantitative Finance and Accounting
Publisher:Springer
ISSN:0924-865X
ISSN (Online):1573-7179
Published Online:15 June 2016

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