IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Do Interest Rates Follow Unit-Root Processes? Evidence from Cross-Maturity Treasury Bill Yields

  • Wu, Yangru
  • Zhang, Hua

It is widely reported in the literature that interest rates follow integrated processes. Many empirical studies have, in fact, taken this result as a maintained hypothesis. This article demonstrates that the failure to reject the hypothesis that interest rates contain a unit root may be due to the severe power of standard test procedures in small samples. We analyze a panel of cross-maturity Treasury-bill yield series by employing a panel-based test. This test exploits cross-maturity variations of the data to improve estimation efficiency and is more powerful than standard tests for unit roots. The critical values of the test statistics are computed by Monte Carlo simulations tailored to our samples. It is found that the null hypothesis that each yield series contains a unit root can be decisively rejected. Our findings cast some doubt on previous studies that rely on the nonstationarity assumption of interest rates. Copyright 1997 by Kluwer Academic Publishers

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.

File URL: http://journals.kluweronline.com/issn/0924-865X/contents
File Function: link to full text
Download Restriction: Access to full text is restricted to subscribers.

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.

Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

Volume (Year): 8 (1997)
Issue (Month): 1 (January)
Pages: 69-81

as
in new window

Handle: RePEc:kap:rqfnac:v:8:y:1997:i:1:p:69-81
Contact details of provider: Web page: http://springerlink.metapress.com/link.asp?id=102990

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.:

as in new window
  1. Gibbons, Michael R & Ramaswamy, Krishna, 1993. "A Test of the Cox, Ingersoll, and Ross Model of the Term Structure," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 619-58.
  2. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-26, February.
  3. Martin D. Evans & Karen K. Lewis, 1992. "Do Stationary Risk Premia Explain It All? Evidence from the Term Structure," Working Papers 92-11, New York University, Leonard N. Stern School of Business, Department of Economics.
  4. Perron, Pierre, 1988. "Trends and random walks in macroeconomic time series : Further evidence from a new approach," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 297-332.
  5. Frederic S. Mishkin, 1988. "What Does the Term Structure Tell Us About Future Inflation?," NBER Working Papers 2626, National Bureau of Economic Research, Inc.
  6. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  7. Engsted, Tom & Tanggaard, Carsten, 1994. "Cointegration and the US term structure," Journal of Banking & Finance, Elsevier, vol. 18(1), pages 167-181, January.
  8. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  9. 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.
  10. Bradley, Michael G. & Lumpkin, Stephen A., 1992. "The Treasury Yield Curve as a Cointegrated System," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(03), pages 449-463, September.
  11. Shea, Gary S, 1992. "Benchmarking the Expectations Hypothesis of the Interest-Rate Term Structure: An Analysis of Cointegration Vectors," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 347-66, July.
  12. Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
  13. Fama, Eugene F & Bliss, Robert R, 1987. "The Information in Long-Maturity Forward Rates," American Economic Review, American Economic Association, vol. 77(4), pages 680-92, September.
  14. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  15. Cochrane, John H., 1991. "A critique of the application of unit root tests," Journal of Economic Dynamics and Control, Elsevier, vol. 15(2), pages 275-284, April.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:kap:rqfnac:v:8:y:1997:i:1:p:69-81. 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: (Guenther Eichhorn)

or (Christopher F. Baum)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.