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September/October 2004, 
Vol. 86, No. 5
Posted 2004-09-01

Testing the Expectations Hypothesis: Some New Evidence for Japan


Deregulation of financial markets in Japan has prompted several investigations of the expectation hypothesis (EH) of the term structure of interest rates. The author expands this literature by estimating a general VAR of the long- and short-term rates and testing restrictions implied by the EH under alternative assumptions about the stationarity of interest rates. He also considers the implications of nonstationarity of interest rates for the EH itself.