ABSTRACTIn this paper we examine whether the rational expectations/constant liquidity premium‐theory can explain the Danish term structure of interest rates during the 1980s. Three types of tests will be conducted: a single‐equation regression test, a volatility‐test, and tests based on a cointegrated VAR‐model. All these tests remain valid even if interest rates individually follow non‐stationary stochastic processes. In contrast to most other empirical studies of the term structure, the evidence generally supports the rational expectations/constant liquidity premi