Estimating the Fractional Order of Integration of Interest Rates Using a Wavelet OLS Estimator
AbstractThe debate on the order of integration of interest rates has long focused on the I(1) versus I(0) distinction. In this paper we instead use the wavelet OLS estimator of Jensen (1999) to estimate the fractional integration parameters of several interest rates for the United States and Canada from 1948 to 1999. We find that most rates are mean-reverting in the very long run, with the fractional order of integration increasing with the term to maturity. The speeds of mean reversion are lower in Canada, likely because of a positive country-specific risk premium. We also demonstrate that interest rate yield spreads involve noticeable persistence, indicating that these are also not strict I(0) processes. One consequence of these findings is that shocks to most interest rates and their spreads are very long lasting, yet not necessarily infinite.
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Bibliographic InfoArticle provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.
Volume (Year): 5 (2001)
Issue (Month): 1 (April)
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Other versions of this item:
- Tkacz, Greg, 2000. "Estimating the Fractional Order of Integration of Interest Rates Using a Wavelet OLS Estimator," Working Papers 00-5, Bank of Canada.
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
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