Arbitrage and the Expectations Hypothesis

Authors

  • Francis A. Longstaff


  • The Anderson School at the University of California at Los Angeles. I am grateful for the comments of Pedro Santa-Clara, Olivier Ledoit, Eduardo Schwartz, two anonymous referees, and the editor, René Stulz. All errors are my responsibility.

Abstract

This paper shows that all traditional forms of the expectations hypothesis can be consistent with the absence of arbitrage if markets are incomplete. A key implication is that the validity of the expectations hypothesis is purely an empirical issue; the expectations hypothesis cannot be ruled out on a priori theoretical grounds.

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