TY - JOUR AU - Bekaert,Geert AU - Hodrick,Robert J. AU - Marshall,David A. TI - "Peso Problem" Explanations for Term Structure Anomalies JF - National Bureau of Economic Research Working Paper Series VL - No. 6147 PY - 1997 Y2 - August 1997 UR - http://www.nber.org/papers/w6147 L1 - http://www.nber.org/papers/w6147.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 examine the empirical evidence on the expectations hypothesis of the term structure of interest rates in the United States, the United Kingdom, and Germany using the Campbell-Shiller (1991) regressions and a vector-autoregressive" methodology. We argue that anomalies in the U.S. term structure, documented by Campbell and Shiller (1991), may be due to a generalized peso problem in which a high-interest rate regime occurred less frequently in the sample of U.S. data than was rationally anticipated. We formalize this idea as a regime-switching model of short-term interest rates estimated with data" from seven countries. Technically, this model extends recent research on regime-switching models with state-dependent transitions to a cross-sectional setting. Use of the small sample distributions generated by the regime-switching model for inference considerably weakens the evidence against the expectations hypothesis, but it remains somewhat implausible that our data-generating process produced the U.S. data. However, a model that combines moderate time-variation in term premiums with peso-problem effects is largely consistent with term structure data from the U.S., U.K., and Germany. ER -