Expectations Hypothesis

Abstract

The term expectations hypothesis ( EH ) stands for numerous statements that link the behavior of short‐term and long‐term interest rates. The literature distinguishes between the pure expectations hypothesis ( PEH ), which postulates that (i) expected excess returns on long‐term over short‐term bonds are zero, (ii) yield term premia are zero, or (iii) forward term premia are zero, from the EH, which postulates that (i) expected excess returns are constant over time, (ii) yield term premia are constant, or (iii) forward term premia are constant over time. We present all the forms of the PEH in discrete time with discrete and continuous compounding and in continuous time (continuous compounding). We will see that the PEH expressions derived in all these models are not equivalent across models as well as within each model.

¿Cómo y qué tanto impacta la deuda pública a las tasas de interés de mercado?

“…10 Para más detalle ver Sangvinatsos (2008) ETTI debe ser proporcional a la prima de rendimientos o spread, la cual se estima como el diferencial del retorno de títulos que vencen en dos horizontes diferentes de tiempo. De esta manera, el spread se entiende como un indicador de la prima de riesgo exigida por los inversionistas por adquirir, por ejemplo, títulos de deuda pública a diferentes plazos y, como tal, incorpora todas las fluctuaciones de la tasa de interés de negociación, consecuencia de las variaciones en las condiciones de mercado y de la economía.…”

How to choose between fixed- and variable-rate loans

“…The expected future reference rates are calculated based on the pure expectation hypothesis (PEH). The hypothesis postulates that the expected future one-period spot rate equals the current one-period forward rate (Sangvinatsos, 2010). Based on the PEH in the discrete time case, we extract expected future reference rates from current interest rate swap rates.…”