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Fractional cointegration and the term structure

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  • Sandrine Lardic

    ()

  • Valérie Mignon

    ()

Abstract

According to the expectations theory of the term structure of interest rates, the yield spread between long-term and short-term interest rates is an optimal predictor of future changes in short rates over the long-run. Results concerning the empirical validity of this hypothesis are not unanimous. These contradictions may be due to the fact that the traditional concept of cointegration is too restrictive. We refer here to the concept of fractional cointegration introduced by Granger (1986). We study the expectations theory by testing for the existence of a (fractional) cointegration relationship between short-term and long-term interest rates. There is evidence of fractional cointegration between interest rates for the G7 countries, with the exception of Germany. Copyright Springer-Verlag 2004

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Bibliographic Info

Article provided by Springer in its journal Empirical Economics.

Volume (Year): 29 (2004)
Issue (Month): 4 (December)
Pages: 723-736

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Handle: RePEc:spr:empeco:v:29:y:2004:i:4:p:723-736

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Keywords: Interest rates; term structure; fractional cointegration; C22; E43;

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Cited by:
  1. 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.).
  2. Daiki Maki, 2013. "Detecting cointegration relationships under nonlinear models: Monte Carlo analysis and some applications," Empirical Economics, Springer, vol. 45(1), pages 605-625, August.

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