Testing the expectations hypothesis in eurodeposits

Abstract

Analyzing data on Euro-rates for 1978-1996, we find consistent evidence in favor of the Expectations Hypothesis (EH) of the term structure: a) interest rates offered on deposits in a given currency form a cointegrated system, b) the restrictions of the EH on the cointegrating relationships are not rejected, except at the longer maturities, c) forward rates contain significant explanatory power on future ¡nterest rates, unbiadsedness being an acceptabIe hypothesis, which d) can lead to good interest rate forecasts, specially at the shorter maturities.