NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Do Stationary Risk Premia Explain It All? Evidence from the Term Struct

Martin D. Evans, Karen K. Lewis

NBER Working Paper No. 3451
Issued in September 1990
NBER Program(s):   ME

Most studies of the expectations theory of the term structure reject the model. However, the significance of the rejections depend strongly upon the form of the test. In this paper, we use the pattern of rejection across maturities to back out the implied behavior of time-varying risk premia and/or market forecasts. We then use a new technique to test whether stationary risk premia alone can be responsible for these rejections. Surprisirj1y, this test is rejected for short maturities up to 6 months, suggesting that time-varying risk premia do not explain it all. We also describe hew this method can be used to test other asset pricing relationships.

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Document Object Identifier (DOI): 10.3386/w3451

Published: Journal of Monetary Economics, vol.33, 1994 April

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