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The CCAPM meets Euro-interest rate persistence, 1960-2000

  • Head, Allen C.
  • Smith, Gregor W.

Euro-interest rates are well-known to be persistent, as are their differentials across countries for a given maturity. The international CCAPM implies that the rates are persistent because forecasts of national consumption growth or inflation are persistent too. We examine this prediction for a panel of countries. The standard CCAPM with power utility is augmented to allow for external habit, government consumption, and adaptive learning. In all cases, we find little evidence that the persistence in Euro-rates is consistent with the CCAPM.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 59 (2003)
Issue (Month): 2 (March)
Pages: 349-366

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Handle: RePEc:eee:inecon:v:59:y:2003:i:2:p:349-366
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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  1. John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
  2. Andrew B. Abel, 1990. "Asset Prices under Habit Formation and Catching up with the Joneses," NBER Working Papers 3279, National Bureau of Economic Research, Inc.
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  8. Timmermann, Allan, 1996. "Excess Volatility and Predictability of Stock Prices in Autoregressive Dividend Models with Learning," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 523-57, October.
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  10. James H. Stock & Jonathan Wright, 2000. "GMM with Weak Identification," Econometrica, Econometric Society, vol. 68(5), pages 1055-1096, September.
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  12. Allan W. Gregory & David G. Watt, 1995. "Sources of Variation in International Real Interest Rates," Working Papers 923, Queen's University, Department of Economics.
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