ABSTRACT:-Expectations hypothesis, which is one among the four different theories covering the term structure, has been most deeply studied in economics. Finance specialists and economists in general have a strong interest in term structure of interest rates as it offers meaningful information regarding the inter-temporal choices made by economic agents. However, one flagrant point on all of these studies is that the expectations hypothesis has been empirically tested mostly in the developed countries thus neglecting the developing countries, in general. The main purpose of this paper is to try to address this gap and assess whether the Expectations Hypothesis theory holds from the perspective of a developing country. Mauritius, which is considered as a developing economy according to the International Monetary Fund’s April 2023 World Economic Outlook, has been used in this study. Treasury Bills of 3-months, 6-months and 1-year maturities have been considered and the ARMA regression techniques have been employed. Three (3) sets of term spread have been calculated, namely, 3months – 1 year, 6months – 1year and 3months – 6months. Empirical findings demonstrate that all the three β coefficients are positive with the highest being 0.81 for the 3-6 months spread and the lowest 0.67 for the 3-12 months spread whereas for the 6-12 months spread, the β estimate is 0.70. This finding proves that the actual term spread has indeed the power to forecast future anticipated changes in the short-term rate. Another important finding is that α, the constant term, bears a negative value meaning that there may be a positive term premium as stated by the liquidity premium theory. For economies like that of Mauritius where commercial banks invest excess liquidity in Government Treasury Bills, studying these theories has all its importance as policymakers can always make reference to address key economic and monetary issues.

Keywords: Expectations Hypothesis, Treasury Bills Rates, Term Spreads, Autoregressive Moving Average (ARMA) Regression Model, Developing Country