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Interest Rates in Germany and the UK: Cointegration and Error Correction Models

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  • Cuthbertson, Keith
  • Hayes, Simon
  • Nitzsche, Dirk

Abstract

The authors test the expectations hypothesis (EH) of the term structure using U.K. and German weekly data on short dated instruments with maturities up to one year. For both data sets comprising k interest rates the authors find that the rank of the cointegrating space is (k - 1); but they can only accept that the cointegrating parameter estimates are of the form (-1, 1, 0,...) etc. when considering bilateral combinations of interest rates. When the authors test the joint null that the set of (k - 1) spreads forms a basis for the cointegration space, this is rejected. However, the point estimates of the cointegration parameters are close to unity and there is no diminution in outside sample forecasting performance of the ECM equations when the spread restrictions are imposed. On balance, one might conclude that the EH is not grossly at variance with the data. Copyright 1998 by Blackwell Publishers Ltd and The Victoria University of Manchester

Suggested Citation

  • Cuthbertson, Keith & Hayes, Simon & Nitzsche, Dirk, 1998. "Interest Rates in Germany and the UK: Cointegration and Error Correction Models," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(1), pages 27-43, January.
    • Handle: RePEc:bla:manch2:v:66:y:1998:i:1:p:27-43
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    References listed on IDEAS

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    Cited by:

    1. Kelvin Balcombe & Richard Tiffin, 2002. "Bootstrap testing of the expectations hypothesis with the term structure of interest rates," Applied Economics Letters, Taylor & Francis Journals, vol. 9(9), pages 563-566.
    2. Georgoutsos, Dimitris A. & Kouretas, Georgios P., 2016. "Interest parity, cointegration, and the term structure: Testing in an integrated framework," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 281-294.
    3. Konstantinou, Panagiotis, 2004. "Term Structure Dynamics: A Daily View from the Hungarian Foreign Currency Deposits Markets," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 57(3), pages 315-331.
    4. Noor Ghazali & Soo-Wah Low, 2002. "The expectation hypothesis in emerging financial markets: the case of Malaysia," Applied Economics, Taylor & Francis Journals, vol. 34(9), pages 1147-1156.
    5. Chew Lian Chua & Chin Nam Low, 2007. "Permanent Structural Change in the US Short-Term and Long-Term Interest Rates," Melbourne Institute Working Paper Series wp2007n22, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    6. Martin T. Bohl & Pierre L. Siklos, 2004. "The Bundesbank's Inflation Policy and Asymmetric Behavior of the German Term Structure," Review of International Economics, Wiley Blackwell, vol. 12(3), pages 495-508, August.
    7. Seppo Pynnönen & Warren Hogan & Jonathan Batten, 2002. "Expectations and Liquidity in Yen Bond Markets," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 7(3), pages 335-354.
    8. A. Mansur & M. Masih & Vicky Ryan, 2005. "The term structure of interest rates in Australia: an application of long run structural modelling," Applied Financial Economics, Taylor & Francis Journals, vol. 15(8), pages 557-573.

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