Testing the expectations hypothesis for the Eurozone: A nonlinear cointegration analysis

Most studies examining the expectations hypothesis (EH) of the term structure of interest rates assume that the adjustment process between short term and long term interest rates is linear. However, ignoring the possible nonlinearity between interest rates may result in misleading empirical results. In this paper, we investigate the term structure of interest rates for selected Eurozone countries using the nonlinear cointegration tests introduced by Kapetanios et al. (2006). Accounting for the effects of global financial and debt crisis, we find supportive evidence for the EH for Greece during the period covering the sovereign debt crisis.