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

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  • Greg Tkacz

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.

Suggested Citation

  • Greg Tkacz, 2000. "Estimating the Fractional Order of Integration of Interest Rates Using a Wavelet OLS Estimator," Staff Working Papers 00-5, Bank of Canada.
    • Handle: RePEc:bca:bocawp:00-5
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    References listed on IDEAS

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    Keywords

    Econometric and statistical methods; Interest rates;

    JEL classification:

    • 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

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