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Level, Slope, Curvature: Characterising the Yield Curve in a Cointegrated VAR Model

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  • Giese, Julia V.

Abstract

Empirical evidence on the expectations hypothesis of the term structure is in-conclusive and its validity widely debated. Using a cointegrated VAR model of US treasury yields, this paper extends a common approach to test the theory. If, as we find, spreads between two yields are non-stationary, the expectations hypothesis fails. However, we present evidence that differences between two spreads are stationary. This suggests that the curvature of the yield curve may be a more meaningful indicator of expected future interest rates than the slope. Furthermore, we characterise level and slope by deriving the common trends inherent in the cointegrated VAR, and establish feedback patterns between them and the macroeconomy. --

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Bibliographic Info

Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 2 (2008)
Issue (Month): 28 ()
Pages: 1-20

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Handle: RePEc:zbw:ifweej:7395

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Keywords: Yield curve; term structure of interest rates; expectations hypothesis; cointegration; common trends;

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  1. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 60(4), pages 473-89, October.
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  14. Shea, Gary S, 1992. "Benchmarking the Expectations Hypothesis of the Interest-Rate Term Structure: An Analysis of Cointegration Vectors," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 10(3), pages 347-66, July.
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Cited by:
  1. Søren Johansen & Katarina Juselius, 2010. "An invariance property of the common trends under linear transformations of the data," CREATES Research Papers 2010-72, School of Economics and Management, University of Aarhus.
  2. Giuseppe Cavaliere & Anders Rahbek & A. M. Robert Taylor, 2008. "Testing for Co-integration in Vector Autoregressions with Non-Stationary Volatility," Discussion Papers 08-34, University of Copenhagen. Department of Economics.
  3. Kevin Hoover & Katarina Juselius, 2012. "Experiments, Passive Observation and Scenario Analysis: Trygve Haavelmo and the Cointegrated Vector Autoregression," Discussion Papers 12-16, University of Copenhagen. Department of Economics.
  4. Giuseppe Cavaliere & Anders Rahbek & A.M.Robert Taylor, 2009. "Co-integration Rank Testing under Conditional Heteroskedasticity," CREATES Research Papers 2009-22, School of Economics and Management, University of Aarhus.
  5. J. James Reade & Ulrich Volz, 2009. "Leader of the Pack? German Monetary Dominance in Europe Prior to EMU," Economics Series Working Papers, University of Oxford, Department of Economics 419, University of Oxford, Department of Economics.
  6. Osmani Teixeira De Carvalho Guillen & José Valentim Machado Vicente, 2011. "Characterizing The Brazilian Termstructure Of Interest Rates In A Cointegrated Var Model," Anais do XXXVIII Encontro Nacional de Economia [Proceedings of the 38th Brazilian Economics Meeting], ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of 041, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  7. Mirkov, Nikola & Sutter, Barbara, 2012. "Central Bank Reserves and the Yield Curve at the ZLB," Working Papers on Finance, University of St. Gallen, School of Finance 1208, University of St. Gallen, School of Finance.
  8. Giuseppe Cavaliere & Anders Rahbek & A. M. Robert Taylor, 2009. "Co-integration rank tests under conditional heteroskedasticity," Discussion Papers, University of Nottingham, Granger Centre for Time Series Econometrics 09/02, University of Nottingham, Granger Centre for Time Series Econometrics.
  9. Johansen, Søren & Juselius, Katarina, 2014. "An asymptotic invariance property of the common trends under linear transformations of the data," Journal of Econometrics, Elsevier, Elsevier, vol. 178(P2), pages 310-315.
  10. Cavaliere, Giuseppe & Rahbek, Anders & Taylor, Robert, 2010. "Determination of the Number of Common Stochastic Trends Under Conditional Heteroskedasticity/Determinación del número de tendencias estocásticas comunes bajo heteroscedasticidad condicional," Estudios de Economía Aplicada, Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 28, pages 519-552, Diciembre.
  11. Søren Johansen, 2012. "The Analysis of Nonstationary Time Series Using Regression, Correlation and Cointegration," Contemporary Economics, University of Finance and Management in Warsaw, University of Finance and Management in Warsaw, vol. 6(2), June.
  12. Katarina Juselius, 2009. "Time to reject the privileging of economic theory over empirical evidence? A Reply to Lawson (2009)," Discussion Papers 09-16, University of Copenhagen. Department of Economics.

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