Testing the expectations hypothesis in Eurodeposits

Analyzing data on Euro-rates for 1978-1998, we find some consistent evidenc e in favor of the Expectations Hypothesis (EH) of the term structure: a) in terest rates offered on deposits in a given currency form a cointegrated sy stem, b) the restrictions of the EH on the cointegrating relationships are not rejected, c) forward rates contain significant explanatory power on fut ure interest rates, unbiasedness being an acceptable hypothesis as a cointe grating relationship between forward rates and the appropriate future value of the corresponding short term interest rate. However, we also provide evidence that past rates contain information addit ional to that in forward rates to predict future short-term rates, against the rational expectations version of the EH and market efficiency. (C) 2000 Elsevier Science Ltd. All rights reserved. JEL classification: E37; E43.