Abstract

AGUDELO RUEDA, Diego  and  ARANGO ARANGO, Mónica. The Yield Curve and the Interest Rates Expectations on Fixed Income Market in Colombia Between 2002 and 2007. Lect. Econ. [online]. 2008, n.68, pp.39-66. ISSN 0120-2596.

How does the yield curve incorporate expectations on the Colombian future short-term interest rates? Two theories have been proposed to explain it: the Expectation Hypothesis and the Liquidity Preference Hypothesis. This paper tests both theories for the TES yield curve as well as for the CDT yield curve, using time-series models that account for the persistence and heteroskedasticity of interest rates. The results support the Liquidity Preference Hypothesis, consistent with the fact that in Colombia long-term rates have been consistently higher than short-term rates. However we found evidence of some predictive power of the long-term rates on the future short term rates, consistent with the Expectation Hypothesis.

Keywords : expectations hypothesis; liquidity preference theory; term structure of interest rates; capital markets; fixed income.

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