This paper applies the Campbell-Shiller (1987) methodology to a study of the
joint behaviour of a three-month and a five-year government yield in the United
States, Canada, the United Kingdom, Germany and Japan. The period studied is
for most countries the mid-1970s to the third quarter of 1997. The empirical
results allow the rejection of the expectations theory of the term structure at
high levels of statistical significance in every country except Japan.
Furthermore, in every country where the expectations theory fails, the failure
of the theory is consistent with the spread overreaction hypothesis of Froot
(1989) and Campbell and Shiller (1991). This implies that the departures of
long rates from levels predicted by the expectations theory in many major
markets cannot be attributed to white noise error terms.