Nonstationary term premia and cointegration of the term structure
This paper proposes a model of the term structure with nonstationary term premia which exhibit a factor structure. This explains the common empirical finding of a cointegrating rank smaller than the one predicted by the rational expectations hypothesis of the term structure. An application to German interest rate data yields easily interpretable results.
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- Tzavalis, Elias & Wickens, Michael R, 1997. "Explaining the Failures of the Term Spread Models of the Rational Expectations Hypothesis of the Term Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 364-80, August.
- Knez, Peter J & Litterman, Robert & Scheinkman, Jose Alexandre, 1994. " Explorations into Factors Explaining Money Market Returns," Journal of Finance, American Finance Association, vol. 49(5), pages 1861-82, December.
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