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Mean Reversion of Interest Rates in the Eurocurrency Market

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  • Jhy‐Lin Wu
  • Show‐Lin Chen

Abstract

One stylised fact to emerge from the empirical analysis of interest rates is that the unit‐root hypothesis in nominal interest rates cannot be rejected. However, using the panel date unit‐root test IM, Pesaran and Shin (1997), we find support for the mean‐reverting property of Eurocurrency rates. Thus, neither a vector‐error‐correction model nor a vector autoregressive model in differences is appropriate for modelling Eurocurrency rates. Instead, conventional modelling strategies with level data are appropriate. Furthermore, the finding of stationary interest rates supports uncovered interest parity, and hence the convergence hypothesis of interest rates. This in turn suggests a limited role for a monetary authority to affect domestic interest rates.

Suggested Citation

  • Jhy‐Lin Wu & Show‐Lin Chen, 2001. "Mean Reversion of Interest Rates in the Eurocurrency Market," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(4), pages 459-473, September.
    • Handle: RePEc:bla:obuest:v:63:y:2001:i:4:p:459-473
    DOI: 10.1111/1468-0084.00229
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