Time Series Analysis of the Expectations Hypothesis for the Japanese Term Structure of Interest Rates in the Presence of Multiple Structural Breaks
AbstractThis paper investigates the expectations hypothesis for the Japanese term structure of interest rates using vector error correction models with multiple structural breaks, focusing on how the breaks affect volatility, risk premium and speed of the adjustment toward the equilibrium. Using 1985-2005 data, we find strong evidence of three structural changes. After the second break point, the term structure relationship is found to be weakened with nearly zero percent short-term interest rate. This finding is consistent with the expectations hypothesis since with very low short-term interest rate the risk premium is dominant in determining long rates.
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Bibliographic InfoPaper provided by Graduate School of Economics, Hitotsubashi University in its series Discussion Papers with number 2006-15.
Length: 31 p.
Date of creation: Nov 2006
Date of revision:
Term structure; Structural break; Cointegration; Bayesian inference; Gibbs sampling; Bayes factor;
Find related papers by JEL classification:
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Chao, John C. & Phillips, Peter C. B., 1999.
"Model selection in partially nonstationary vector autoregressive processes with reduced rank structure,"
Journal of Econometrics,
Elsevier, vol. 91(2), pages 227-271, August.
- John C. Chao & Peter C.B. Phillips, 1997. "Model Selection in Partially Nonstationary Vector Autoregressive Processes with Reduced Rank Structure," Cowles Foundation Discussion Papers 1155, Cowles Foundation for Research in Economics, Yale University.
- Sola, Martin & Driffill, John, 1994. "Testing the term structure of interest rates using a stationary vector autoregression with regime switching," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 601-628.
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