Arbitrage and the Expectations Hypothesis

Arbitrage and the Expectations Hypothesis

  • Francis A. Longstaff

Article first published online: 17th December 2002 DOI: 10.1111/0022-1082.00234

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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