It is commonly found in empirical studies that nominal interest rates contain a unit root, implying that these variables have a permanent memory. One of the characteristics of a nonstationary time series is that it has no tendency to return to its mean values, meaning that the series is trending and can become arbitrarily high or even negative. With respect to interest rates this seems contrary to economic intuition and stylised facts. In this paper we question the reliability of the unit root hypothesis alone to describe the time series behaviour of interest rates and try another tack, i.e. threshold cointegration, applying nonparametric methods. Three different data sets representing two different long-run relations are examined. Two are related to the yield spread in the American and the German market while the third is akin to the relationship between U.S. and Eurodollar interest rates. Overall, our empirical evidence corroborates the existence of threshold cointegration in these data sets. Furthermore, using Monte Carlo simulations we show that undetected threshold cointegration leads to overestimate the error-correction-coefficients in error correction models. With respect to empirical modelling this implies the wide-spread view that the longer the observation period the better suited are cointegration techniques has to be, at least partly, revised for variables such as interest rates or inflation rates.
Download Info
To our knowledge, this item is not available for
download. To find whether it is available, there are three
options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page
whether it is in fact available.
3. Perform a search for a similarly titled item that would be
available.
Publisher Info
Paper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number
371.
Length: pages Date of creation: Jun 1996 Date of revision: Handle: RePEc:bon:bonsfb:371
Contact details of provider: Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany Fax: +49 228 73 9221 Web page: http://www.bgse.uni-bonn.de/index.php?id=517
For technical questions regarding this item, or to correct its listing, contact: (Daniel Park).
Find related papers by JEL classification: C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates