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Mean-Variance Cointegration and the Expectations Hypothesis

  • Till Strohsal
  • Enzo Weber

The present paper sheds further light on a well-known (alleged) violation of the expec- tations hypothesis of the term structure (EHT) - the frequent finding of unit roots in interest rate spreads. We show that the EHT implies (i) that the nonstationarity stems from the holding premium, which is hence (ii) cointegrated with the spread. In a stochas- tic discount factor framework we model the premium as being driven by the integrated variance of excess returns. Introducing the concept of mean-variance cointegration we actually find cointegration relations between spreads and premia in US data.

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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2011-007.

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Length: 34 pages
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2011-007
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