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Estimating the Fractional Order of Integration of Interest Rates Using a Wavelet OLS Estimator

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  • Tkacz, Greg

Abstract

The debate on the order of integration of interest rates has long focused on the I(1) versus I(0) distinction. In this paper, we use instead the wavelet OLS estimator of Jensen (1999) to estimate the fractional integration parameters of several interest rates for the United States and Canada from 1948 to 1999. We find that most rates are mean-reverting in the very long run, with the fractional order of integration increasing with the term to maturity. The speeds of mean-reversion are lower in Canada, due likely to a positive country-specific risk premium. We also demonstrate that yield spreads contain noticeable persistence, indicating that these are also not strict I(0) processes. The consequences of these findings are that shocks to most interest rates and their spreads are very long-lasting, yet not necessarily infinite.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 00-5.

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Length: 31 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:bca:bocawp:00-5

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Keywords: Econometric and statistical methods; Interest rates;

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Cited by:
  1. Esben Hoeg & Per Frederiksen, 2006. "The Fractional OU Process: Term Structure Theory and Application," Computing in Economics and Finance 2006 194, Society for Computational Economics.
  2. Crowley, Patrick, 2005. "An intuitive guide to wavelets for economists," Research Discussion Papers 1/2005, Bank of Finland.
  3. Adam Golinski & Peter Spencer, 2012. "The Meiselman forward interest rate revision regression as an Affine Term Structure Model," Discussion Papers 12/27, Department of Economics, University of York.
  4. Alper Ozun & Atilla Cifter, 2008. "Modeling long-term memory effect in stock prices: A comparative analysis with GPH test and Daubechies wavelets," Studies in Economics and Finance, Emerald Group Publishing, vol. 25(1), pages 38-48, March.
  5. Elder, John & Jin, Hyun Joung & Koo, Won W., 2004. "A Reexamination Of Fractional Integrating Dynamics In Foreign Currency Markets," 2004 Annual meeting, August 1-4, Denver, CO 20004, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  6. Vuorenmaa , Tommi, 2005. "A wavelet analysis of scaling laws and long-memory in stock market volatility," Research Discussion Papers 27/2005, Bank of Finland.
  7. Matthew Greenwood-Nimmo & Youngcheol Shin, 2011. "Shifting Preferences at the Fed: Evidence from Rolling Dynamic Multipliers and Impulse Response Analysis," Working Papers 2011-057, Madras School of Economics,Chennai,India.
  8. Luis Gil-Alana, 2003. "Strong dependence in the real interest rates," Applied Economics, Taylor & Francis Journals, vol. 35(2), pages 119-124.
  9. Cifter, Atilla & Yilmazer, Sait & Cifter, Elif, 2009. "Analysis of sectoral credit default cycle dependency with wavelet networks: Evidence from Turkey," Economic Modelling, Elsevier, vol. 26(6), pages 1382-1388, November.
  10. Jan Beran & Dirk Ocker, 2002. "Pricing of cap-interest rates based on renewal processes," CoFE Discussion Paper 02-10, Center of Finance and Econometrics, University of Konstanz.
  11. Simeon Coleman & Kavita Sirichand, 2011. "Fractional integration and the volatility of UK interest rates," Discussion Papers in Economics 11/29, Department of Economics, University of Leicester, revised May 2011.
  12. In, Francis & Kim, Sangbae, 2006. "Multiscale hedge ratio between the Australian stock and futures markets: Evidence from wavelet analysis," Journal of Multinational Financial Management, Elsevier, vol. 16(4), pages 411-423, October.
  13. Coleman, Simeon, 2012. "Where Does the Axe Fall? Inflation Dynamics and Poverty Rates: Regional and Sectoral Evidence for Ghana," World Development, Elsevier, vol. 40(12), pages 2454-2467.
  14. Høg, Espen P. & Frederiksen, Per H., 2006. "The Fractional Ornstein-Uhlenbeck Process: Term Structure Theory and Application," Finance Research Group Working Papers F-2006-01, University of Aarhus, Aarhus School of Business, Department of Business Studies.
  15. Alagidede, Paul & Coleman, Simeon & Cuestas, Juan Carlos, 2012. "Inflationary shocks and common economic trends: Implications for West African monetary union membership," Journal of Policy Modeling, Elsevier, vol. 34(3), pages 460-475.

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