Testing the expectations hypothesis of the term structure using instrumental variables

Abstract

This paper demonstrates, by means of Monte Carlo experimentation, that tests of the expectations hypothesis of the term structure based on instrumental variables regressions of the change in the short rate on the relevant lagged yield spread are prone to severe over‐rejection when the term premium is time‐varying. In contrast, tests based on regressions of the yield spread on the first‐difference of the short rate are found to reject at the correct rate in moderately sized samples. © 1998 John Wiley & Sons, Ltd.

The impact of bank capital on profitability and risk in Asian banking

“…The GMM approach is superior to traditional OLS in examining financial variable movements. For instance, Driffill et al (1998) indicate that a conventional OLS analysis of the actual change in the short rate on the relevant lagged term spread yields coefficients with some wrong signs and wrong size.…”

Real term structure forecasts of consumption growth

“…This excess return is referred to the literature as term premium (see, e.g., Tzavalis and Wickens (1997), Driffill et al (1997, 1998), Bolder (2001 and Duffee (2002)). Joint estimation of this excess return relationship and interest rate relationship (9), for different τ, will help us to identify from the data the price of risk slope coefficients λ 1,i , which determine the time-varying part of the term premium.…”

Innovations and liquidity risks: Evidence from commercial banks in Vietnam

“…However, Greene (2005) indicates that the Generalized Method of Moments (GMM) method is more efficient than Panel Least Squares method. Driffill et al (1998) demonstrated that the GMM technique outperforms the classic OLS method because it mitigates heteroskedasticity. Therefore, we employ the dynamic system GMM to mitigate the endogeneity issue.…”