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

Bulkley, George and Harris, Richard DF and Nawosah, Vivekanand (2015) 'Can behavioral biases explain the rejections of the expectation hypothesis of the term structure of interest rates?' Journal of Banking & Finance, 58 (C). pp. 179-193. ISSN 0378-4266

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Abstract

We test whether the rejections of the expectations hypothesis 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, which are consistent with these two biases. We show that a trading strategy that exploits these biases delivers significant economic profits and that our results are unlikely to be driven by a time-varying risk premium.

Item Type: Article
Uncontrolled Keywords: Behavioral bias; Expectations hypothesis of the term structure of interest rates; Representativeness; Law of small numbers; Conservatism
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences
Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
SWORD Depositor: Elements
Depositing User: Elements
Date Deposited: 05 May 2015 08:21
Last Modified: 15 Jan 2022 00:33
URI: http://repository.essex.ac.uk/id/eprint/13665

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