Estimating the Fractional Order of Integration of Interest Rates Using a Wavelet OLS Estimator
AbstractThe 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 InfoPaper provided by Bank of Canada in its series Working Papers with number 00-5.
Length: 31 pages
Date of creation: 2000
Date of revision:
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Econometric and statistical methods; Interest rates;
Other versions of this item:
- Tkacz Greg, 2001. "Estimating the Fractional Order of Integration of Interest Rates Using a Wavelet OLS Estimator," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 5(1), pages 1-15, April.
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-07-03 (All new papers)
- NEP-ECM-2000-07-03 (Econometrics)
- NEP-ETS-2000-07-03 (Econometric Time Series)
- NEP-FMK-2000-07-03 (Financial Markets)
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