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Near unit roots, cointegration, and the term structure of interest rates

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  • Markku Lanne

    (Research Unit on Economic Structures and Growth, Department of Economics, PO Box 54 (Unioninkatu 37), FIN-00014, University of Helsinki, Finland)

Abstract

The term structure of interest rates is often modelled as a cointegrated system with the yield spreads forming the cointegrating vectors. Testing whether the yield spreads span the cointegration space is problematic because conventional tests on the cointegration vectors tend to overreject when the largest autoregressive roots deviate from unity, as is likely to be the case with interest rates. A new test that is robust w.r.t. deviations from the exact unit root assumption is developed and applied to monthly US interest rate data from 1952:1-1991:2. Taking into account the regime shift in 1979, the hypothesis of the yield spreads being the cointegrating vectors cannot be rejected using the robust test. Copyright © 2000 John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 15 (2000)
Issue (Month): 5 ()
Pages: 513-529

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Handle: RePEc:jae:japmet:v:15:y:2000:i:5:p:513-529

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References

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Citations

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Cited by:
  1. Olga Susana M. Monteiro & Artur C. B. da Silva Lopes, 2010. "Short- and Long-Run Tests of the Expectations Hypothesis: The Portuguese Case," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 56(3), pages 257-280.
  2. Dimitris A. Georgoutsos & Petros Migiakis, 2010. "European sovereign bond spreads: monetary unification, market conditions and financial integration," Working Papers 115, Bank of Greece.
  3. Zacharias Bragoudakis & Dimitrios Sideris, 2012. "Do retail gasoline prices adjust symmetrically to crude oil price changes? the case of the Greek oil market," Economic Bulletin, Bank of Greece, Economic Research Department, issue 37, pages 7-21, December.
  4. 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.).
  5. Silva Lopes, Artur C. & M. Monteiro, Olga Susana, 2007. "The expectations hypothesis of the term structure: some empirical evidence for Portugal," MPRA Paper 3437, University Library of Munich, Germany.
  6. Petros M. Migiakis, 2012. "Reviewing the proposals for common bond issuances by the euro-area sovereign under a long-term perspective," Economic Bulletin, Bank of Greece, Economic Research Department, issue 37, pages 43-54, December.
  7. 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.
  8. Dimitris A. Georgoutsos & Petros Migiakis, 2012. "Heterogeneity of the determinants of euro-area sovereign bond spreads; what does it tell us about financial stability?," Working Papers 143, Bank of Greece.
  9. 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.
  10. Nagayasu, Jun, 2002. "On the term structure of interest rates and inflation in Japan," Journal of Economics and Business, Elsevier, vol. 54(5), pages 505-523.
  11. Sarno, Lucio & Thornton, Daniel L., 2003. "The dynamic relationship between the federal funds rate and the Treasury bill rate: An empirical investigation," Journal of Banking & Finance, Elsevier, vol. 27(6), pages 1079-1110, June.
  12. Lima, Luiz Renato & Xiao, Zhijie, 2007. "Do shocks last forever? Local persistency in economic time series," Journal of Macroeconomics, Elsevier, vol. 29(1), pages 103-122, March.
  13. Dimitris A. Georgoutsos & Petros M. Migiakis, 2009. "Benchmark bonds interactions under regime shifts," Working Papers 103, Bank of Greece.
  14. Costas N. Kanellopoulos, 2012. "The Size and structure of uninsured employment," Economic Bulletin, Bank of Greece, Economic Research Department, issue 37, pages 23-41, December.

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