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A Re-Examination of Traditional Hypotheses about the Term Structure of Interest Rates

John C. Cox, Jonathan E. Ingersoll, Jr. and Stephen A. Ross
The Journal of Finance
Vol. 36, No. 4 (Sep., 1981), pp. 769-799
Published by: Wiley for the American Finance Association
DOI: 10.2307/2327547
Stable URL: http://www.jstor.org/stable/2327547
Page Count: 31
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A Re-Examination of Traditional Hypotheses about the Term Structure of Interest Rates
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Abstract

The term structure of interest rates is an important subject to economist, and has a long history of traditions. This paper re-examines many of these traditional hypotheses while employing recent advances in the theory of valuation and contingent claims. We show how the Expectations Hypothesis and the Preferred Habitat Theory must be reformulated if they are to obtain in a continuous-time, rational-expectations equilibrium. We also modify the linear adaptive interest rate forecasting models, which are common to the macro-economic literature, so that they will be consistent in the same framework.

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