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Mean-Variance Cointegration and the Expectations Hypothesis

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  • Strohsal, Till

    ()

  • Weber, Enzo

    ()

Abstract

The 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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File URL: http://epub.uni-regensburg.de/15152/1/MeanVarianceCointegration.pdf
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Bibliographic Info

Paper 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.

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Date of creation: 31 May 2010
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Handle: RePEc:bay:rdwiwi:15152

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Keywords: Expectations Hypothesis; Holding Premium; Persistence; Cointegration; GARCH;

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