Testing a Model of the Term Structure of Interest Rates in an Error-learning Framework

Abstract

The error-learning model was proposed by Meiselman (1962) as an explanation of how expectations of future interest rates are revised and as a device for testing the expectations theory of the term structure of interest rates. According to the model, expected rates are revised in response to the error in anticipating the current one-period spot rate. The model is particularly well suited to Meiselman's application, since in the context of the expectation theory, expected future rates may be observed directly as the forward rates implicit in the term structure. Denoting the forward rate at time t on a oneperiod loan in period t + i by trt+? and the current one-period spot rate by Rt, Meiselman's error-learning model is given by