When unit roots matter: excess volatility and excess smoothness of long term interest rates
AbstractThis paper reexamines volatility tests of the expectations model of the term structure of interest rates. The restrictions of the model are studied in a general multivariate MA representation of the time series process of interest rates under various assumptions on the number of unit roots and the pattern of cointegration. Test statistics are computed by Bayesian techniques. We find that the long term interest rate overreacts to transitory shocks, and underreacts to permanent shocks.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Minneapolis in its series Discussion Paper / Institute for Empirical Macroeconomics with number 44.
Date of creation: 1991
Date of revision:
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