Two implications of the expectations hypothesis are as follows: (i) The current value of the yield spread should predict future changes in the shorter-term yield. Therefore the expectations hypothesis implies that in a VAR model for ( , ) where , lagged values of should Granger-cause current values of (Campbell and Shiller, 1987, Table 3; Cuthbertson et al., 1996, Table 6). (ii) A positive value for the yield spread should be followed by an increase in the yield on bonds that are currently due to mature n months from now. Consider the following regression: The expectations hypothesis implies ?=0 and ?=1. Below, we will test this hypothesis for (n,m)=(6,3) and (12,6) (Campbell and Shiller, 1991, Table 1; Cuthbertson et al., 1996, Table 4). References Campbell, J.Y. and Shiller, R.J. (1987). Cointegration and tests of present value models. Journal of Political Economy 95, 1062-1088. Campbell, J.Y. and Shiller, R.J. (1991). Yield spreads and interest rate movements: a bird’s eye view. Review of Economic Studies 58, 495-514. Cuthbertson, K., Hayes, S. and Nitzsche, D. (1996). The behaviour of certificate of deposit rates in the UK. Oxford Economic Papers 48, 397-414.