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Fractional integration and the volatility of UK interest rates

  • Simeon Coleman


  • Kavita Sirichand


Using fractional integration and GARCH modeling techniques, this paper investigates the dynamic properties of UK interest rates. We find evidence that, contrary to previous studies for the US and Canada, short rates are more nonstationary compared to longer rates. Further, differences in conditional volatility exist between rates of different maturities. We posit that the dynamics of interest rates may be both maturity-specific and country-specific and any a priori generalizing assumptions may be misleading.

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Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 11/29.

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Date of creation: May 2011
Date of revision: May 2011
Handle: RePEc:lec:leecon:11/29
Contact details of provider: Postal: Department of Economics University of Leicester, University Road. Leicester. LE1 7RH. UK
Phone: +44 (0)116 252 2887
Fax: +44 (0)116 252 2908
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  1. Bertrand Candelon & Luis A. Gil-Alana, 2006. "Mean Reversion of Short-run Interest Rates in Emerging Countries," Review of International Economics, Wiley Blackwell, vol. 14(1), pages 119-135, 02.
  2. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
  3. 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.
  4. Vitor Leone & Bruce Philp, 2010. "Surplus-Value And Aggregate Concentration In The Uk Economy, 1987-2009," Working Papers 2010/10, Nottingham Trent University, Nottingham Business School, Economics Division.
  5. Phillips, Peter C.B., 2007. "Unit root log periodogram regression," Journal of Econometrics, Elsevier, vol. 138(1), pages 104-124, May.
  6. John Barkoulas & Christopher Baum & Mustafa Caglayan, 1999. "Fractional monetary dynamics," Applied Economics, Taylor & Francis Journals, vol. 31(11), pages 1393-1400.
  7. Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
  8. John Y. Campbell & Robert J. Shiller, 1989. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," NBER Working Papers 3153, National Bureau of Economic Research, Inc.
  9. Mishkin, Frederic S., 1992. "Is the Fisher effect for real? : A reexamination of the relationship between inflation and interest rates," Journal of Monetary Economics, Elsevier, vol. 30(2), pages 195-215, November.
  10. Peter C.B. Phillips, 1999. "Discrete Fourier Transforms of Fractional Processes," Cowles Foundation Discussion Papers 1243, Cowles Foundation for Research in Economics, Yale University.
  11. Menelaos Karananos & S.H Sekioua & N Zeng, 2005. "On the order of integration of monthly US ex-ante and ex-post real interest rates new evidence from over a century of data," Money Macro and Finance (MMF) Research Group Conference 2005 21, Money Macro and Finance Research Group.
  12. Christopher F. Baum & John Barkoulas & Mustafa Caglayan, 1996. "Persistence in International Inflation Rates," Boston College Working Papers in Economics 333., Boston College Department of Economics.
  13. Silva Lopes, Artur C. & M. Monteiro, Olga Susana, 2007. "The expectations hypothesis of the term structure: some empirical evidence for Portugal," MPRA Paper 3437, University Library of Munich, Germany.
  14. Tkacz, Greg, 2000. "Estimating the Fractional Order of Integration of Interest Rates Using a Wavelet OLS Estimator," Staff Working Papers 00-5, Bank of Canada.
  15. Tsay, Wen-Jen, 2000. "Long memory story of the real interest rate," Economics Letters, Elsevier, vol. 67(3), pages 325-330, June.
  16. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  17. Robert Ackrill & Adrian Kay, 2010. "WTO Regulations and Bioenergy Sustainability Certification – Synergies and Possible Conflicts," Working Papers 2010/9, Nottingham Trent University, Nottingham Business School, Economics Division.
  18. Cuthbertson, Keith & Hayes, Simon & Nitzsche, Dirk, 2000. "Are German money market rates well behaved?," Journal of Economic Dynamics and Control, Elsevier, vol. 24(3), pages 347-360, March.
  19. Baillie, Richard T., 1996. "Long memory processes and fractional integration in econometrics," Journal of Econometrics, Elsevier, vol. 73(1), pages 5-59, July.
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