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Where (and by how much) does a theory break down? With an application to the expectation hypothesis.

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Title: Where (and by how much) does a theory break down? With an application to the expectation hypothesis.
Authors: Abadir, KM
Atanasova, C
Item Type: Chapter
Abstract: The authors provide new evidence in favor of the expectation hypothesis (EH) as a long-run theory of the term structure of interest rates. Using nonparametric techniques first, the authors show that the results of conventional tests that reject EH are strongly affected by the presence of extreme observations – only a handful in the case of longer maturities. The authors then provide a new general methodology that determines the number of outliers causing any theory to fail, and their approach quantifies the extent of this failure.
Editors: Chudik, A
Hsiao, C
Timmermann, A
Issue Date: 18-Jan-2022
URI: http://hdl.handle.net/10044/1/98127
DOI: 10.1108/S0731-90532021000043B011
ISBN: 978-1-80262-066-5
Publisher: Emerald
Start Page: 255
End Page: 267
Journal / Book Title: Essays in Honor of M. Hashem Pesaran: Panel Modeling, Micro Applications, and Econometric Methodology: Volume 43B
Volume: 4.
Copyright Statement: © 2022 Karim M. Abadir and Christina Atanasova
Sponsor/Funder: Economic & Social Research Council (ESRC)
Funder's Grant Number: ES/F015909/1
Keywords: Finance
Econometrics
Publication Status: Published
Online Publication Date: 2022-01-18
Appears in Collections:Imperial College Business School