Expectation hypothesis and term structure anomaly

Campbell and Shiller (1991) find the presence of term structure anomaly, in which the slope of the term structure predicts inconsistently to the change in yield of longer term bonds over the life of shorter term bonds during 1952-1987. Focusing on the post Campbell and Shiller period, our findings suggest that the anomaly is not only attributed to term premia but also relates to expectation errors. We found that macroeconomic surprises and irrationality from investors' behaviour are important determinants of time-varying expectation errors. These factors are capable of explaining the rejection of the expectation hypothesis and the U.S. term structure anomaly in long-term securities.