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Do Interest Rates Follow Unit-Root Processes? Evidence from Cross-Maturity Treasury Bill Yields

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Author Info
 Wu, Yangru
Zhang, Hua

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Abstract

It is widely reported in the literature that interest rates follow integrated processes. Many empirical studies have, in fact, taken this result as a maintained hypothesis. This article demonstrates that the failure to reject the hypothesis that interest rates contain a unit root may be due to the severe power of standard test procedures in small samples. We analyze a panel of cross-maturity Treasury-bill yield series by employing a panel-based test. This test exploits cross-maturity variations of the data to improve estimation efficiency and is more powerful than standard tests for unit roots. The critical values of the test statistics are computed by Monte Carlo simulations tailored to our samples. It is found that the null hypothesis that each yield series contains a unit root can be decisively rejected. Our findings cast some doubt on previous studies that rely on the nonstationarity assumption of interest rates. Copyright 1997 by Kluwer Academic Publishers

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Publisher Info
Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

Volume (Year): 8 (1997)
Issue (Month): 1 (January)
Pages: 69-81
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Handle: RePEc:kap:rqfnac:v:8:y:1997:i:1:p:69-81

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Web page: http://springerlink.metapress.com/link.asp?id=102990

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  1. Maurice Obstfeld & Jay Shambaugh & Alan Taylor, 2004. "The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility," International Finance 0407003, EconWPA. [Downloadable!]
    Other versions:
  2. Jumah, Adusei & Kunst, Robert M., 2002. "On Mean Reversion in Real Interest Rates: An Application of Threshold Cointegtation," Economics Series 109, Institute for Advanced Studies. [Downloadable!]
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This page was last updated on 2009-12-23.

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