Uncovered Interest Rate Parity and the Expectations Hypothesis of the Term Structure: Empirical Results for the U.S. and Europe
AbstractA system of U.S. and euro area short- and long-term interest rates is analyzed. According to the expectations hypothesis of the term structure the interest rate spreads should be stationary and according to the uncovered interest rate parity the difference between the U.S. and euro area longterm interest rates should also be stationary. If all four interest rates are integrated of order one, one would expect to find three linearly independent cointegration relations in the system of four interest rate series. Combining German and European Monetary Union data to obtain the euro area interest rate series we find indeed the theoretically expected three cointegration relations, in contrast to previous studies based on different data sets.
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Date of creation: 2005
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Unit Roots; Multiple Frequency I(1) Process; Nonrational Transfer Function; Cointegration; VARMA Process; Information Criteria;
Other versions of this item:
- Ralf Brüggemann & Helmut Lütkepohl, 2005. "Uncovered Interest Rate Parity and the Expectations Hypothesis of the Term Structure: Empirical Results for the U.S. and Europe," SFB 649 Discussion Papers SFB649DP2005-035, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-08-13 (All new papers)
- NEP-EEC-2005-08-13 (European Economics)
- NEP-FMK-2005-08-13 (Financial Markets)
- NEP-MON-2005-08-13 (Monetary Economics)
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