Can Behavioral Finance Explain the Term Structure Puzzles? George Bulkley 1 , Richard D. F. Harris 2 and Vivekanand Nawosah 3 March 2007 Paper Number: 07/05 Abstract We test two well-known behavioral models using the expectations of the short yield that are implicit in the term structure of interest rates. We find evidence that is consistent with these models. To investigate whether these behavioral biases are sufficient to explain the scale of the empirical rejections of the expectations hypothesis, we simulate behaviorally biased expectations of the short yield and use these to construct long yields. We apply the conventional tests to the simulated data and are able to generate rejections of the expectations hypothesis that are similar to those observed in practice. Keywords: Behavioral finance; Expectations hypothesis of the term structure of interest rates; Momentum; Return reversals. 1 Xfi Centre for Finance and Investment, University of Exeter, Exeter EX4 4ST, UK. Email: I.G.Bulkley@exeter.ac.uk . 2 Xfi Centre for Finance and Investment, University of Exeter, Exeter EX4 4ST, UK. Email: R.D.F.Harris@exeter.ac.uk . 3 Xfi Centre for Finance and Investment, University of Exeter, Exeter EX4 4ST, UK. Email: V.Nawosah@exeter.ac.uk . We gratefully acknowledge financial support from the ESRC under research grant ACRR2784.