ABSTRACT
The expectations theory of the term structure posits that variables in the information set at time t should have no predictive power for excess bond returns. Consider the predictive regression
rt+h = a + b ′ Zt + eth where rt+h is excess returns for holding period h, and Zt is a set of predictors. Conventional tests often reject the null hypothesis that the parameter vector b is zero. Some suggest that over-rejections may arise if r is stationary and the
of Empirical
variables Z are highly persistent, making inference highly distorted in finite samples. For this reason, researchers often use finite sample corrections or the bootstrap to conduct inference. However, it is often the case that robust inference still points to a rejection of the null hypothesis.
