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Publication - Professor George Bulkley

    Structural Breaks, Parameter Uncertainty and Term Structure Puzzles

    Citation

    Bulkley, I & Paolo, G, 2011, ‘Structural Breaks, Parameter Uncertainty and Term Structure Puzzles’. Journal of Financial Economics, vol 102., pp. 222 - 232

    Abstract

    We show that uncertainty about parameters of the short rate model can account for the rejections of the expectations hypothesis for the term structure of interest rates. We assume that agents employ Bayes rule to learn parameter values in the context of a model that is subject to stochastic structural breaks. We show that parameter uncertainty also implies that the verdict on the expectations hypothesis varies systematically with the term of the long bond and the particular test employed, in the same way that is found in empirical tests.

    Full details in the University publications repository