Mean-Variance Cointegration and the Expectations Hypothesis
AbstractThe present work provides an economic explanation of a well-known (seeming) violation of the expectations hypothesis of the term structure (EHT) - the frequent finding of unit roots in interest rate spreads. We derive from EHT that the nonstationarity stems from the holding premium, which is hence cointegrated with the spread. We model the premium as being proportional to the integrated variance of excess returns and further propose a cointegration test. Simulating the distribution of the test statistic we actually find cointegration relations between premia and spreads in US data. The EHT appears to perform better than previously thought.
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Bibliographic InfoPaper provided by University of Regensburg, Department of Economics in its series University of Regensburg Working Papers in Business, Economics and Management Information Systems with number 442.
Date of creation: 31 May 2010
Date of revision:
Expectations Hypothesis; Holding Premium; Persistence; Cointegration; GARCH;
Other versions of this item:
- Till Strohsal & Enzo Weber, 2011. "Mean-Variance Cointegration and the Expectations Hypothesis," SFB 649 Discussion Papers SFB649DP2011-007, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-07-24 (All new papers)
- NEP-FMK-2010-07-24 (Financial Markets)
- NEP-MAC-2010-07-24 (Macroeconomics)
- NEP-MON-2010-07-24 (Monetary Economics)
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