This paper presents new tests of the efficient markets view of the interest rate term structure utilizing recently developed cointegration methodology in a bivariate autoregressive system consisting of the "spread" between long and short interest rates and the change in the Treasury Bill rate. The efficient markets restrictions on the bivariate autoregressive system are supported by U.K. data from 1963:1 to 1987:1. Further support is obtained from som e simple Granger-causality tests. However, volatility statistics give rather mixed results. On balance, the authors' findings suggest a risk-adjusted expectations approach to the term structure. Copyright 1988 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research
