Revisiting the expectations hypothesis: The Japanese term structure and regime shifts

This paper re-examines the expectations hypothesis of the Japanese term structure along two dimensions: (a) allowing regime shifts in interest rate dynamics; (b) introducing macroeconomic factors as conditioning information. The empirical analysis suggests that the expectations hypothesis is an inadequate description of the Japanese term structure even after taking account of regime shifts. However, I find that regime shift is a salient feature of the Japanese term structure and regimes are intimately related to economic activities. (C) 2011 Elsevier Inc. All rights reserved.