Term Structure Anomalies: Term Premium or Peso Problem?

43 Pages Posted: 31 Oct 2010

Date Written: May 1, 2006


The goal of this paper is to develop a test for the relative importance of the time-varying term premium and the peso-problem for rejection of the Expectation Hypothesis of the Term Structure (EHTS). Our reasoning is based on a term structure model that allows for both phenomena simultaneously. If we assume that only one regime is observed ex-post, we can estimate all the information we need to evaluate distortions generated by both hypotheses. We can also test the presence of a peso-problem. Firstly we find that a peso-problem might explain rejection of the EHTS in Germany and the United Kingdom after the European exchange rate crisis. Secondly, we show that this explanation appears inappropriate to explain the EHTS failure in the United States.

Keywords: Expectation theory of the term structure, peso problem, time varying term premium

JEL Classification: E43, E52, C22

Suggested Citation

Jardet, Caroline, Term Structure Anomalies: Term Premium or Peso Problem? (May 1, 2006). Banque de France Working Paper No. 143, Available at SSRN: https://ssrn.com/abstract=1699598 or http://dx.doi.org/10.2139/ssrn.1699598

Caroline Jardet (Contact Author)

Banque de France ( email )

31 rue croix des petits champs
75049 Paris Cedex 01

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