THE TERM STRUCTURE OF INTEREST-RATES IN THE LONDON INTERBANK MARKET

We test the conjecture that the highly competitive nature of the Londo n interbank market will result in longer-term rates determined primari ly by expectations of future short-term rates. In so doing we employ b oth cointegration tests, and the VAR approach proposed by Campbell and Shiller. Our results are generally supportive of the expectations hyp othesis and, in contrast to all previous studies which have employed t he VAR approach, we cannot reject the restrictions implied by the expe ctations hypothesis. The only indication of marginal deviations from t he expectations hypothesis may be found at the very short end of the i nterbank spectrum.