Date of Publication


Document Type

Master's Thesis

Degree Name

Master of Science in Financial Engineering

Subject Categories

Finance and Financial Management


Ramon V. Del Rosario College of Business


Financial Management Department

Thesis Adviser

Estelito C. Blacora

Defense Panel Chair

Leonardo B. Araneta

Defense Panel Member

Joseph James F. Lago
Alfredo M. Santoyo


The Philippine bond market is regarded by many as an inefficient market (i.e., a market in which security prices do not reflect all available information in the current prices of the securities in an instantaneous manner) due to its state of relative underdevelopment. However, in the 1970s, Eugene F. Fama published an important thesis in the field of Financial Economics where he suggested that a financial market (e.g., a bond market) may remain efficient for as long as investors take into account all available information in making their investment decisions. This thesis is popularly known as the Efficient Markets Hypothesis (EMH). This study aims to test the EMH using the Philippine bond market as the empirical platform. Guided by the dictates of the EMH, this study assesses the efficiency of the Philippine bond market using the Expectations Theory (ET), as it is the most extensively used theory in explaining the term structure of interest rates. Similar to other studies, regression tests on the forward premiums of short-term (i.e., 3, 6, 12 months) interest rates over various forecast horizons were conducted to determine if the forward premiums are efficient predictors of changes in short-term interest rates. Alternatively, regression tests were also carried out on the predictive power of the slope of the yield curve on the changes of medium-term (i.e., 5 years) and long term (i.e., 10 and 20 years) interest rates. A further decomposition of the forward premiums was carried out to check if the components (i.e., the term premium and expectations components) behave in-line with what is implied by the ET. The tests were carried out over three periods: 1) the entire sample period, October 1998 to December 2008; the pre-inflation targeting regime, October 1998 to January 2002, and the inflation targeting regime, January 2002 to December 2008. The breakdown of periods, according to the type of monetary policy regime, was conducted to determine if a change or shift in policy regime affects market efficiency. The results of the empirical tests reject the predictions of the ET and, by the extension, the EMH, due to following reasons: 1) the term structure of interest rates is not an efficient predictor of changes in interest rates, i.e., it lacks the predictive power, and/or 2) the term premia are time varying. This suggests inefficiencies in information absorption/assimilation exist in the Philippine bond market and may result in the suboptimal valuation of bonds. As such, it is recommended that further studies be undertaken on the minimization and/or removal of information asymmetries and that policy reforms be designed to incorporate elements that will improve the information infrastructure of the country to address these market inefficiencies. The establishment and ongoing development of the Fixed Income Exchange is an important initiative towards this goal.

Abstract Format






Accession Number


Shelf Location

Archives, The Learning Commons, 12F Henry Sy Sr. Hall

Physical Description

130 leaves ; 28 cm.


Bond markets-Philippines; Bond market

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