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Time Series Analysis of the Expectations Hypothesis for the Japanese Term Structure of Interest Rates in the Presence of Multiple Structural Breaks

  • Sugita, Katsuhiro
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    This paper investigates the expectations hypothesis for the Japanese term structure of interest rates using vector error correction models with multiple structural breaks, focusing on how the breaks affect volatility, risk premium and speed of the adjustment toward the equilibrium. Using 1985-2005 data, we find strong evidence of three structural changes. After the second break point, the term structure relationship is found to be weakened with nearly zero percent short-term interest rate. This finding is consistent with the expectations hypothesis since with very low short-term interest rate the risk premium is dominant in determining long rates.

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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/16983/1/070econDP06-15.pdf
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    Paper provided by Graduate School of Economics, Hitotsubashi University in its series Discussion Papers with number 2006-15.

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    Length: 31 p.
    Date of creation: Nov 2006
    Date of revision:
    Handle: RePEc:hit:econdp:2006-15
    Contact details of provider: Phone: +81-42-580-8000
    Web page: http://www.econ.hit-u.ac.jp/

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    7. Kleibergen, F.R. & Paap, R., 1998. "Priors, posteriors and Bayes factors for a Bayesian analysis of cointegration," Econometric Institute Research Papers EI 9821, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
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    12. Markku Lanne, 1999. "Near Unit Roots And The Predictive Power Of Yield Spreads For Changes In Long-Term Interest Rates," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 393-398, August.
    13. Jun Nagayasu, 2003. "The Term Structure of Interest Rates and Monetary Policy During a Zero-Interest-Rate Period," IMF Working Papers 03/208, International Monetary Fund.
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    15. Shiller, Robert J. & Huston McCulloch, J., 1990. "The term structure of interest rates," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 13, pages 627-722 Elsevier.
    16. Peter Reinhard Hansen, 2000. "Structural Changes in the Cointegrated Vector Autoregressive Model," Working Papers 2000-20, Brown University, Department of Economics.
    17. Wang, Jiahui & Zivot, Eric, 2000. "A Bayesian Time Series Model of Multiple Structural Changes in Level, Trend, and Variance," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(3), pages 374-86, July.
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    19. Yao, Yi-Ching, 1988. "Estimating the number of change-points via Schwarz' criterion," Statistics & Probability Letters, Elsevier, vol. 6(3), pages 181-189, February.
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