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Nonstationary term premia and cointegration of the term structure

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  • Carstensen, Kai

Abstract

This paper proposes a model of the term structure with nonstationary term premia which exhibit a factor structure. This explains the common empirical finding of a cointegrating rank smaller than the one predicted by the rational expectations hypothesis of the term structure. An application to German interest rate data yields easily interpretable results.

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File URL: http://www.sciencedirect.com/science/article/B6V84-48XSFWM-1/2/1afe45ff2e9597618aafe332b3f60ba1
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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 80 (2003)
Issue (Month): 3 (September)
Pages: 409-413

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Handle: RePEc:eee:ecolet:v:80:y:2003:i:3:p:409-413

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References

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  1. Qiang Dai & Kenneth J. Singleton, 2000. "Specification Analysis of Affine Term Structure Models," Journal of Finance, American Finance Association, vol. 55(5), pages 1943-1978, October.
  2. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-77, Sept.-Oct.
  3. Evans, Martin D. D. & Lewis, Karen K., 1994. "Do stationary risk premia explain it all?: Evidence from the term structure," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 285-318, April.
  4. Knez, Peter J & Litterman, Robert & Scheinkman, Jose Alexandre, 1994. " Explorations into Factors Explaining Money Market Returns," Journal of Finance, American Finance Association, vol. 49(5), pages 1861-82, December.
  5. Tzavalis, Elias & Wickens, Michael R, 1997. "Explaining the Failures of the Term Spread Models of the Rational Expectations Hypothesis of the Term Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 364-80, August.
  6. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-26, February.
  7. Lucas, André, 1997. "Cointegration Testing Using Pseudolikelihood Ratio Tests," Econometric Theory, Cambridge University Press, vol. 13(02), pages 149-169, April.
  8. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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Cited by:
  1. Christian Kascha & Carsten Trenkler, 2011. "Cointegrated VARMA models and forecasting US interest rates," ECON - Working Papers 033, Department of Economics - University of Zurich.
  2. Giese, Julia V., 2008. "Level, Slope, Curvature: Characterising the Yield Curve in a Cointegrated VAR Model," Economics Discussion Papers 2008-13, Kiel Institute for the World Economy.
  3. Fladung, Michael, 2007. "Spill-over effects of monetary policy: a progress report on interest rate convergence in Europe," Discussion Paper Series 1: Economic Studies 2007,27, Deutsche Bundesbank, Research Centre.

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