Level, Slope, Curvature: Characterising the Yield Curve in a Cointegrated VAR Model

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Level, Slope, Curvature: Characterising the Yield Curve in a Cointegrated VAR Model

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Giese, Julia V.

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Julia V. Giese

Abstract

Empirical evidence on the expectations hypothesis of the term structure is in-conclusive and its validity widely debated. Using a cointegrated VAR model of US treasury yields, this paper extends a common approach to test the theory. If, as we find, spreads between two yields are non-stationary, the expectations hypothesis fails. However, we present evidence that differences between two spreads are stationary. This suggests that the curvature of the yield curve may be a more meaningful indicator of expected future interest rates than the slope. Furthermore, we characterise level and slope by deriving the common trends inherent in the cointegrated VAR, and establish feedback patterns between them and the macroeconomy. --

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Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2008-13.

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Date of creation: 2008
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Handle: RePEc:zbw:ifwedp:7214

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Article
- Giese, Julia V., 2008. "Level, Slope, Curvature: Characterising the Yield Curve in a Cointegrated VAR Model," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2(28), pages 1-20. [Downloadable!]

Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-04-29 (All new papers)
NEP-MAC-2008-04-29 (Macroeconomics)
NEP-MON-2008-04-29 (Monetary Economics)

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