We investigate whether term structure anomalies in U.S. data may be due to a generalized peso problem, in which a high-interest-rate regime occurred less frequently in the U.S. sample than was rationally anticipated. We formalize this idea by estimating a regime-switching model of short-term interest rates with data from seven countries. Under the small-sample distributions generated by the model, the expectations hypothesis is rejected. When we allow moderate time variation in term premiums, the term-premium dynamics interact with peso-problem effects to generate small-sample distributions more consistent with the data. Nonetheless, our model cannot fully account for U.S. term structure anomalies.
Bekaert, Geert, Robert Hodrick, and David Marshall. "'Peso Problem' Explanations for Term Structure Anomalies." Journal of Monetary Economics 48, no. 2 (October 2001): 241-70.
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