Testing the expectations hypothesis of the term structure of interest rates in the presence of a potential regime shift

The expectations hypothesis of the term structure of interest rates is tested with monthly Eurodollar deposit rates for maturities of 1, 3 and 6 months covering the period 1983:1-1999:6. Classical regression based tests indicate rejection, while tests in a new model allowing for potential regime shifts that have not occurred in the sample period lend support to the expectations hypothesis. The results imply that the potential regime shift affected the expectations concerning the longer-term interest rate only in a short period at the beginning of the sample when the interest rates were highest.