Testing the Expectation Theory of the Term Structure of Interest Rates in Turkish Fixed-Income Securities Market

Abstract

This study empirically tests the expectations hypothesis of term structure of interest rates, in Turkish fixed-income securities market. In the study Johansen and Juselius (JJ test) co-integration test has been applied to determine the existence of at least one common trend between short and long term bond interest rates, and it has determined. Therefore both r =0 and also r≤1 co-integration vector hypothesis have been rejected. In other words, based on the data covering January 3, 2003 through June 2010, and consist of 89 observation on each of the 8 different maturity ranging from 3 months to 5 years, it was determined that there were more than 1 co-integration ( r>1) vector in the series. The results indicate that in Turkish fixed-income securities market shorter-term interest rates effects longer-term interest rates. In fact, granger causality test applied and its results also confirm the findings cited above. Besides, the study is bearing some very important implications for Turkish monetary authorities that they could predict and observe behavior of the longer-term interest rates, and also inflation rates, based on the given change in short-term interest rates. In this aspect, this study is unique.