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The Term Structure of Interest Rates as a Cointegrated System: Empirical Evidence from the Eurocurrency Market

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  • Mougoue, Mbodja
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    Abstract

    In this paper the author examines the term structure of Eurocurrency interest rates from six countries (with maturities of one, two, three, and six months) using unit root tests and cointegration tests that are robust to departures from independent and identically distributed errors. The main conclusions are: (1) Eurocurrency interest rates have one (and only one) unit root when viewed individually, and (2) for each of the countries examined, Eurocurrency interest rates are cointegrated--with one equilibrium relationship--when viewed jointly. These conclusions are consistent with the weak form of the efficient market hypothesis and suggest that in efficient markets arbitrage generally prevents rates on different maturities of a given asset from drifting too far for an extended period.

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    Bibliographic Info

    Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

    Volume (Year): 15 (1992)
    Issue (Month): 3 (Fall)
    Pages: 285-96

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    Handle: RePEc:bla:jfnres:v:15:y:1992:i:3:p:285-96

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0270-2592
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    Web page: http://www.southwesternfinance.org/
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    Cited by:
    1. Cavaliere Giuseppe & Fanelli Luca & Paruolo Paolo, 2001. "Determining the number of cointegrating relations under rank constraints," Economics and Quantitative Methods qf0109, Department of Economics, University of Insubria.
    2. Chiang, Thomas C. & Chiang, Jeanette Jin, 1995. "Emperical analysis of short-term eurocurrency rates: Evidence from a transfer function error correction model," Journal of Economics and Business, Elsevier, vol. 47(4), pages 335-351, October.
    3. Sharon Kozicki & P.A. Tinsley, 1997. "Shifting endpoints in the term structure of interest rates," Research Working Paper 97-08, Federal Reserve Bank of Kansas City.
    4. John Barkoulas & Christopher F. Baum & Gurkan S. Oguz, 1996. "Fractional Cointegration Analysis of Long Term International Interest Rates," Boston College Working Papers in Economics 315., Boston College Department of Economics.
    5. Sharon Kozicki & P.A. Tinsley, 1997. "Moving endpoints and the internal consistency of agents' ex ante forecasts," Research Working Paper 97-01, Federal Reserve Bank of Kansas City.
    6. Sharon Kozicki & Peter A. Tinsley, . "Moving Endpoints in Macrofinance," Computing in Economics and Finance 1996 _058, Society for Computational Economics.
    7. Chiang, Thomas C., 1997. "Time series dynamics of short-term interest rates: evidence from Eurocurrency markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 7(3), pages 201-220, October.
    8. Patel, Ajay & Shoesmith, Gary L., 2004. "Term structure linkages surrounding the Plaza and Louvre accords: Evidence from Euro-rates and long-memory components," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2051-2075, September.

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