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Nonlinear Adjustment in US Bond Yields: an Empirical Analysis with Conditional Heteroskedasticity

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Lucchetti, Riccardo
Palomba, Giulio

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Abstract

Starting from the work by Campbell and Shiller (1987), empirical analysis of interest rates has been conducted in the framework of cointegration. However, parts of this approach have been questioned recently, as the adjustment mechanism may not follow a simple linear rule; another line of criticism points out that stationarity of the spreads is difficult to maintain empirically. In this paper, we analyse data on US bond yields by means of an augmented VAR specification which approximates a generic nonlinear adjustment model. We argue that nonlinearity captures macro information via the shape of the yield curve and thus provides an alternative explanation for some findings recently appeared in the literature. Moreover, we show how conditional heteroskedasticity can be taken into account via GARCH specifications for the conditional variance, either univariate and multivariate.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11571.

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Date of creation: 2008
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Handle: RePEc:pra:mprapa:11571

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Related research
Keywords: interest rates; cointegration; nonlinear adjustment; conditional heteroskedasticity;

Find related papers by JEL classification:
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates

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