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Publication - Professor George Bulkley

    Can behavioral biases explain the rejections of the expectation hypothesis of the term structure of interest rates?

    Citation

    Bulkley, IG, Harris, R & Nawosah, V, 2015, ‘Can behavioral biases explain the rejections of the expectation hypothesis of the term structure of interest rates?’. Journal of Banking and Finance, vol 58., pp. 179-193

    Abstract

    We test whether the rejections of the expectations hypothesis of the term structure of interest rates can be explained by two behavioral biases: the law of small numbers and conservatism. We use the term structure to decompose excess bond returns into components related to expectation errors and expectation revisions, enabling a direct test of behavioral models using the expectations of market participants. We find systematic patterns in expectation errors, and expectation revisions, that are consistent with these two biases. Moreover, we show that our
    results are unlikely to be driven by a time-varying risk premium.

    Full details in the University publications repository