Working Paper: NBER ID: w0869
Authors: David S. Jones; V. Vance Roley
Abstract: This paper tests the joint hypothesis of rational expectations and the expectations model of the term structure for three- and six-month Treasury bills. Previous studies are extended in three directions. First, common efficient markets-rational expectations tests are compared, and it is shown that four of the five tests considered are asymptotically equivalent, and that the fifth is less restrictive than the other four. Second, the joint hypothesis is tested using weekly data for Treasury bills maturing in exactly 13 and 26 weeks beginning in 1970 and ending in 1979. In contrast, previous studies using comparable data have typically discarded 12/13 of the sample to form a nonoverlapping data set. Finally, a more complete set of possible determinants of time-varying term premiums is tested.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rejection of the null hypothesis (C12) | unanticipated changes in yields occur only when unanticipated information is observed by investors (D84) |
| investors do not form expectations rationally or equilibrium yields contain time-varying term premiums (E43) | time-varying term premiums depend on available information (E43) |
| expected quarterly holding-period yield on a six-month treasury bill (E43) | constant term premium (G22) |