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When unit roots matter: excess volatility and excess smoothness of long term interest rates


  • Peter Schotman


This paper reexamines volatility tests of the expectations model of the term structure of interest rates. The restrictions of the model are studied in a general multivariate MA representation of the time series process of interest rates under various assumptions on the number of unit roots and the pattern of cointegration. Test statistics are computed by Bayesian techniques. We find that the long term interest rate overreacts to transitory shocks, and underreacts to permanent shocks.

Suggested Citation

  • Peter Schotman, 1991. "When unit roots matter: excess volatility and excess smoothness of long term interest rates," Discussion Paper / Institute for Empirical Macroeconomics 44, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmem:44

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    1. Heckman, James J, 1974. "Shadow Prices, Market Wages, and Labor Supply," Econometrica, Econometric Society, vol. 42(4), pages 679-694, July.
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