Testing the expectations model of the term structure in times of financial transition

The efficient market theory of the term structure (expectations theory plus rational expectations) is tested using cointegration methods and a long time span of historical data. The data are from eighteenth century England. The data set is intriguing in that it covers many sub-periods of financial transition. The contribution of this paper lies crucially on this historical period with its changing economic and political environment. For this reason considerable effort has gone into dealing with structural or transitional changes using modern econometric methods. Evidence supporting the efficient market theory is found conditional on the existence of a regime transition in the last decade of the eighteenth century.