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Mean Reversion of Interest Rates in the Eurocurrency Market

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  • Wu, Jhy-Lin
  • Chen, Show-Lin
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    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. Copyright 2001 by Blackwell Publishing Ltd

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    Bibliographic Info

    Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics & Statistics.

    Volume (Year): 63 (2001)
    Issue (Month): 4 (September)
    Pages: 459-73

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    Handle: RePEc:bla:obuest:v:63:y:2001:i:4:p:459-73

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    Cited by:
    1. Aksoy, Yunus & León-Ledesma, Miguel A., 2005. "Interest rates and output in the long-run," Working Paper Series 0434, European Central Bank.
    2. Erik Hjalmarsson & Par Osterholm, 2007. "Testing for cointegration using the Johansen methodology when variables are near-integrated," International Finance Discussion Papers 915, Board of Governors of the Federal Reserve System (U.S.).
    3. Meredith Beechey & Erik Hjalmarsson & Par Osterholm, 2008. "Testing the expectations hypothesis when interest rates are near integrated," International Finance Discussion Papers 953, Board of Governors of the Federal Reserve System (U.S.).
    4. Christiansen, Charlotte, 2010. "Mean reversion in US and international short rates," The North American Journal of Economics and Finance, Elsevier, vol. 21(3), pages 286-296, December.
    5. Gil-Alana, Luis A., 2004. "Long memory in the U.S. interest rate," International Review of Financial Analysis, Elsevier, vol. 13(3), pages 265-276.
    6. Lau, Evan & Baharumshah, Ahmad Zubaidi & Haw, Chan Tze, 2006. "Current account: mean-reverting or random walk behavior?," Japan and the World Economy, Elsevier, vol. 18(1), pages 90-107, January.
    7. Erik Hjalmarsson & Pär Österholm, 2010. "Testing for cointegration using the Johansen methodology when variables are near-integrated: size distortions and partial remedies," Empirical Economics, Springer, vol. 39(1), pages 51-76, August.
    8. Kutan, Ali M. & Yigit, Taner M., 2002. "Nominal and real stochastic convergence within transition economies and to the European Union: Evidence from panel data," ZEI Working Papers B 21-2002, ZEI - Center for European Integration Studies, University of Bonn.
    9. Erik Hjalmarsson & Par Osterholm, 2007. "A residual-based cointegration test for near unit root variables," International Finance Discussion Papers 907, Board of Governors of the Federal Reserve System (U.S.).
    10. Ling, Tai-Hu & Liew, Venus Khim-Sen & Syed Khalid Wafa, Syed Azizi Wafa, 2007. "Fisher hypothesis: East Asian evidence from panel unit root tests," MPRA Paper 5432, University Library of Munich, Germany.
    11. Ling, Tai-Hu & Venus, Khim-Sen Liew & Syed Khalid Wafa, Syed Azizi Wafa, 2008. "Does Fisher hypothesis hold for the East Asian Economies? an application of panel unit root tests," MPRA Paper 21601, University Library of Munich, Germany, revised Jan 2010.
    12. Liew, Venus Khim-Sen & Ling, Tai-Hu, 2008. "Real interest rate parity: evidence from East Asian economies relative to China," MPRA Paper 7291, University Library of Munich, Germany.

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