VARIANCE BOUND TESTS OF BOND MARKET-EFFICIENCY

In this paper we examine variance bound tests of the joint hypothesis that (1) bond markets are efficient and (2) the term structure is dete rmined by the expectations hypothesis. Both the Singleton and Shiller tests are shown to be seriously biased toward rejecting the joint hypo thesis in finite samples. Flavin's test is unbiased but has a very hig h variance leading to many false rejections of the joint hypothesis. W hen corrected as suggested by Flavin, Shiller's test is unbiased and h as a relatively low variance. Unfortunately, it is also sensitive to m easurement error.