Fractional Cointegration Analysis of Long Term International Interest Rates
DeGennaro, Kunkel, and Lee (1994) studied the long run dynamics of a system of long term interest rates of five industrialized countries by means of sophisticated cointegration methods. They found little evidence in support of the cointegration hypothesis, thus concluding that a separate set of fundamentals drives the dynamics of each of the individual long term interest rate series. In this study, we extend their analysis by exploring the possibility of very slow mean reverting dynamics (fractional cointegration) in the system of the five long term interest rates. We use the GPH test as our testing methodology for fractional integration and cointegration. Through rigorous investigation of the full system of the five long term interest rate series and its various subsystems, we provide evidence that the error correction term follows a fractionally integrated process with long memory, that is, it is mean reverting, though not covariance stationary. Despite significant persistence in the short run, a shock to the system of long term interest rates eventually dissipates so that an equilibrium relationship prevails in the long run.
|Date of creation:||01 Jan 1996|
|Date of revision:|
|Publication status:||published, International Journal of Finance, 1997, 9:2, 586-606.|
|Contact details of provider:|| Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA|
Web page: http://fmwww.bc.edu/EC/
More information through EDIRC
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.:
- DeGennaro, Ramon P & Kunkel, Robert A & Lee, Junsoo, 1994. "Modeling International Long-Term Interest Rates," The Financial Review, Eastern Finance Association, vol. 29(4), pages 577-97, November.
- Mbodja Mougoué, 1992. "The Term Structure Of Interest Rates As A Cointegrated System: Empirical Evidence From The Eurocurrency Market," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 15(3), pages 285-296, 09.
- 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.
- Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992.
"Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?,"
Journal of Econometrics,
Elsevier, vol. 54(1-3), pages 159-178.
- Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
- Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?," Cowles Foundation Discussion Papers 979, Cowles Foundation for Research in Economics, Yale University.
- 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.
- Peter C.B. Phillips, 1985.
"Time Series Regression with a Unit Root,"
Cowles Foundation Discussion Papers
740R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1986.
- Sims, Christopher A., 1988.
"Bayesian skepticism on unit root econometrics,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 12(2-3), pages 463-474.
- Christopher A. Sims, 1988. "Bayesian skepticism on unit root econometrics," Discussion Paper / Institute for Empirical Macroeconomics 3, Federal Reserve Bank of Minneapolis.
- Francis X. Diebold & Javier Gardeazabal & Kamil Yilmaz, 1993.
"On cointegration and exchange rate dynamics,"
93-2, Federal Reserve Bank of Philadelphia.
- 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.
- Engle, Robert & Granger, Clive, 2015.
"Co-integration and error correction: Representation, estimation, and testing,"
Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
- 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.
- 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.
- 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.).
- Mougoue, Mbodja, 1992. "The Term Structure of Interest Rates as a Cointegrated System: Empirical Evidence from the Eurocurrency Market," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 15(3), pages 285-96, Fall.
- Banerjee, Anindya, et al, 1986. "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 253-77, August.
- Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
- Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
When requesting a correction, please mention this item's handle: RePEc:boc:bocoec:315. 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: (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.