Estimating the Fractional Order of Integration of Interest Rates Using a Wavelet OLS Estimator
The debate on the order of integration of interest rates has long focused on the I(1) versus I(0) distinction. In this paper we instead use the wavelet OLS estimator of Jensen (1999) to estimate the fractional integration parameters of several interest rates for the United States and Canada from 1948 to 1999. We find that most rates are mean-reverting in the very long run, with the fractional order of integration increasing with the term to maturity. The speeds of mean reversion are lower in Canada, likely because of a positive country-specific risk premium. We also demonstrate that interest rate yield spreads involve noticeable persistence, indicating that these are also not strict I(0) processes. One consequence of these findings is that shocks to most interest rates and their spreads are very long lasting, yet not necessarily infinite.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 5 (2001)
Issue (Month): 1 (April)
|Contact details of provider:|| Web page: http://www.degruyter.com|
|Order Information:||Web: http://www.degruyter.com/view/j/snde|
References listed on IDEAS
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.:
- G. Pfann & P. Schotman & R. Tschernig, 1994.
"Nonlinear Interest Rate Dynamics and Implications for the Term Structure,"
SFB 373 Discussion Papers
1994,43, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
- Pfann, Gerard A. & Schotman, Peter C. & Tschernig, Rolf, 1996. "Nonlinear interest rate dynamics and implications for the term structure," Journal of Econometrics, Elsevier, vol. 74(1), pages 149-176, September.
- Francis X. Diebold & Javier Gardeazabal & Kamil Yilmaz, 1993.
"On cointegration and exchange rate dynamics,"
93-2, Federal Reserve Bank of Philadelphia.
- Baillie, Richard T & Bollerslev, Tim, 1989. " Common Stochastic Trends in a System of Exchange Rates," Journal of Finance, American Finance Association, vol. 44(1), pages 167-81, March.
- Perron, P, 1988.
"The Great Crash, The Oil Price Shock And The Unit Root Hypothesis,"
338, Princeton, Department of Economics - Econometric Research Program.
- Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
- Diebold, Francis X. & Rudebusch, Glenn D., 1991.
"On the power of Dickey-Fuller tests against fractional alternatives,"
Elsevier, vol. 35(2), pages 155-160, February.
- Francis X. Diebold & Glenn D. Rudebusch, 1990. "On the power of Dickey-Fuller tests against fractional alternatives," Finance and Economics Discussion Series 119, Board of Governors of the Federal Reserve System (U.S.).
- Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
- Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
- Sowell, Fallaw, 1990. "The Fractional Unit Root Distribution," Econometrica, Econometric Society, vol. 58(2), pages 495-505, March.
- Baillie, R.T. & Bollerslev, T., 1993.
"Cointegration, Fractional Cointegration, and Exchange RAte Dynamics,"
9103, Michigan State - Econometrics and Economic Theory.
- Baillie, Richard T & Bollerslev, Tim, 1994. " Cointegration, Fractional Cointegration, and Exchange Rate Dynamics," Journal of Finance, American Finance Association, vol. 49(2), pages 737-45, June.
- Dolado, Juan J & Jenkinson, Tim & Sosvilla-Rivero, Simon, 1990. " Cointegration and Unit Roots," Journal of Economic Surveys, Wiley Blackwell, vol. 4(3), pages 249-73.
- Cheung, Yin-Wong & Lai, Kon S, 1993. "A Fractional Cointegration Analysis of Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(1), pages 103-12, January.
- William R. Parke, 1999. "What Is Fractional Integration?," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 632-638, November.
- Estrella, Arturo & Hardouvelis, Gikas A, 1991.
" The Term Structure as a Predictor of Real Economic Activity,"
Journal of Finance,
American Finance Association, vol. 46(2), pages 555-76, June.
- Arturo Estrella & Gikas A. Hardouvelis, 1989. "The term structure as a predictor of real economic activity," Research Paper 8907, Federal Reserve Bank of New York.
When requesting a correction, please mention this item's handle: RePEc:bpj:sndecm:v:5:y:2001:i:1:n:2. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla)
If references are entirely missing, you can add them using this form.