A Re-examination of the Rational Expectations Hypothesis of the Term Structure: Reconciling the Evidence from Long-Run and Short-Run Tests.

This paper explains the contradictory findings from long-run and short-run tests of the rational expectations hypothesis of the term structure. Recent research suggests that, while the long-run tests support the theory, the short-run tests do not. Our results which are based on US Treasury bills rates confirm this and suggest that the conflict in the evidence can be explained by the presence of a stationary, time-varying, term premium. Nevertheless, "news" about future changes in short rates are far more important than the risk premium in explaining interest rate movements at the short end of the term structure, and comprise the main source of the single factor explanation that emerges from our results. Copyright @ 1998 by John Wiley & Sons, Ltd. All rights reserved.