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A Cointegration Analysis of Treasury Bill Yields

  • Hall, Anthony D
  • Anderson, Heather M
  • Granger, Clive W J

This paper shows that yields to maturity of U.S. Treasury bills are cointegrated and that, during periods when the Federal Reserve specifically targeted short-term interest rates, the spreads between yields of different maturity define the cointegrating vectors. This cointegrating relationship implies that a single nonstationary common factor underlies the time-series behavior of each yield to maturity and that risk premia are stationary. An error-correction model that uses spreads as the error-correction terms is unstable over the Federal Reserve's policy regime changes, but a model using post 1982 data is stable and is shown to be useful for forecasting changes in yields. Copyright 1992 by MIT Press.

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Article provided by MIT Press in its journal Review of Economics & Statistics.

Volume (Year): 74 (1992)
Issue (Month): 1 (February)
Pages: 116-26

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Handle: RePEc:tpr:restat:v:74:y:1992:i:1:p:116-26
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