Ex ante bond returns and the liquidity preference hypothesis

Jacob Boudoukh, Matthew Richardson, Tom Smith, Robert F. Whitelaw

Research output: Contribution to journalArticle

12 Citations (Scopus)

Abstract

We provide a formal test of the liquidity preference hypothesis (LPH), that is, the monotonicity of ex ante term premiums, using nonparametric estimates that do not require a structural model for conditional expected returns. Although the point estimates of the term premiums are consistent with previous conclusions in the literature regarding violations of the LPH, the test statistics are generally insignificant even when powerful conditioning information is used. These results illustrate the importance of correctly accounting for correlations across maturities and of formally testing the inequality restrictions implied by the LPH.

Original languageEnglish
Pages (from-to)1153-1167
Number of pages15
JournalJournal of Finance
Volume54
Issue number3
DOIs
Publication statusPublished - Jun 1999
Externally publishedYes

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