The term structure of Australian interest rates: tests of the expectation hypothesis

Abstract

This paper studies the expectation hypothesis relating to the term structure of Australian interest rates. We use monthly data on 90-day bank accepted bills and the 10-year Treasury bond over the period 1969–94. The test equation follows the approach in Campbell and Shiller (1987, 1988) and we pay careful attention to ARCH effects and problems poised by overlapping data. Our results indicate that the restrictions of the interest rate expectational hypothesis are not rejected by the dataset.