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Time Series Analysis of the Expectations Hypothesis for the Japanese Term Structure of Interest Rates in the Presence of Multiple Structural Breaks

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  • Sugita, Katsuhiro
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    Abstract

    This 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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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/16983/1/070econDP06-15.pdf
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    Bibliographic Info

    Paper provided by Graduate School of Economics, Hitotsubashi University in its series Discussion Papers with number 2006-15.

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    Length: 31 p.
    Date of creation: Nov 2006
    Date of revision:
    Handle: RePEc:hit:econdp:2006-15

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    Web page: http://www.econ.hit-u.ac.jp/
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    Related research

    Keywords: Term structure; Structural break; Cointegration; Bayesian inference; Gibbs sampling; Bayes factor;

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    1. 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.
    2. 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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