This paper tests the Expectations Hypothesis of the Term Structure (EHTS) for Malaysia during the period following the Asian financial crisis. A multivariate cointegration approach provides evidence favorable to the EHTS, notwithstanding the uncertain support for the "symmetry" restriction and the existence of significant risk premia at all maturities. Causality tests reveal, moreover, that the short-term interest rate is strongly exogenous. Overall, these results are consistent with a policy based on a short-term interest rate instrument, albeit with some relevant qualifications related to the need of a gradualist approach in monetary policy implementation and of further research about the nature of term premia components.
The Expectations Hypothesis of the Term Structure in Emerging Financial Markets: Some Evidence from Malaysia (1999-2015)
TRONZANO, MARCO ROBERTO
2015-01-01
Abstract
This paper tests the Expectations Hypothesis of the Term Structure (EHTS) for Malaysia during the period following the Asian financial crisis. A multivariate cointegration approach provides evidence favorable to the EHTS, notwithstanding the uncertain support for the "symmetry" restriction and the existence of significant risk premia at all maturities. Causality tests reveal, moreover, that the short-term interest rate is strongly exogenous. Overall, these results are consistent with a policy based on a short-term interest rate instrument, albeit with some relevant qualifications related to the need of a gradualist approach in monetary policy implementation and of further research about the nature of term premia components.
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