Expectations hypothesis in the context of debt crisis: Evidence from five major EU countries

The present paper examines the empirical adequacy of the expectations hypothesis of the term structure of interest rates in the context of the current debt crisis. Using a sample consisted of the five largest EU countries, namely France, Germany, Italy, Spain and the United Kingdom, and accounting for structural breaks in the data, I investigate cointegration, spread stationarity, validity of the cross-equation restrictions implied by the theory, and the possibility of excess returns. Overall, the empirical findings are against the EHTS for the whole maturity spectrum, implying evidence of economically important deviations from the theory. Only for specific spreads of France, Germany, Italy and the United Kingdom there is some evidence in favour of the expectations hypothesis.