TY - JOUR AU - Bekaert,Geert AU - Hodrick,Robert J. AU - Marshall,David A. TI - On Biases in Tests of the Expecations Hypothesis of the Term Structure Of Interest Rates JF - National Bureau of Economic Research Technical Working Paper Series VL - No. 191 PY - 1996 Y2 - January 1996 UR - http://www.nber.org/papers/t0191 L1 - http://www.nber.org/papers/t0191.pdf N1 - Author contact info: Geert Bekaert Graduate School of Business Columbia University 3022 Broadway, 411 Uris Hall New York, NY 10027 Tel: 212/854-9156 Fax: 212/662-8474 E-Mail: gb241@columbia.edu Robert J. Hodrick Graduate School of Business Columbia University 3022 Broadway New York, NY 10027 Tel: 212/854-3413 Fax: 212/316-9219 E-Mail: rh169@columbia.edu David Marshall Federal Reserve Bank of Chicago 230 South La Salle Street Chicago, IL 60690 E-Mail: david.marshall@chi.frb.org AB - We document extreme bias and dispersion in the small sample distributions of five standard regression tests of the expectations hypothesis of the term structure of interest rates. These biases derive from the extreme persistence in short interest rates. We derive approximate analytic expressions for these biases, and we characterize the small-sample distributions of these test statistics under a simple first-order autoregressive data generating process for the short rate. The biases are also present when the short rate is modeled with a more realistic regime-switching process. The differences between the small-sample distributions of test statistics and the asymptotic distributions partially reconcile the different inferences drawn when alternative tests are used to evaluate the expectations hypothesis. In general, the test statistics reject the expectations hypothesis more strongly and uniformly when they are evaluated using the small-sample distributions, as compared to the asymptotic distributions. ER -