THE TERM STRUCTURE OF INTEREST RATES IN THE LONDON INTERBANK MARKET

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