Does The Expectations Hypothesis Explain The Term Structure Of Treasury Bond Yields In Tunisia?

Abstract

This paper tests the expectations hypothesis (EH) using monthly data for Treasury bond yields (TBYs) over the period 1994m5–2014m12 and ranging in maturity from one year to 10 years. We apply cointegrated-VAR jointly on more than one pair of yields. The results suggest rejection of the EH throughout the medium maturity spectrum. However, for longer maturities they suggest the validity of the EH for the TBYs. This indeed confirms the smooth functioning of Tunisian bond market which gives an indication that the yield curve should serve as an indicator to the monetary policymakers to manage inflation and to influence the aggregate demand in the economy.