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Yield Curve as a Cointegrated System: Evidence from Australian Treasury Securities

Author

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  • Ram Bhar

    (School of Banking and Finance, University of New South Wales)

Abstract

This paper examines the structure of yield on Australian Treasury securities ranging in maturities from thirteen weeks to fifteen years using unit roots tests and cointegration tests. There is strong evidence to suggest that the six treasury securities considered, are cointegrated irrespective of which one is selected as the dependent variable in cointegration tests. Granger representation theorem is then applied to identify an error-correction model in forecasting Treasury security yield is compared with that of an augmented vector autoregression model (VAR). The forecast by the error-correction model shows 35% improvement in terms of root mean squared error (RMSE) relative to the VAR model.

Suggested Citation

  • Ram Bhar, 1994. "Yield Curve as a Cointegrated System: Evidence from Australian Treasury Securities," Working Paper Series 35, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    • Handle: RePEc:uts:wpaper:35
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    File URL: http://www.finance.uts.edu.au/research/wpapers/wp35.pdf
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    References listed on IDEAS

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    Cited by:

    1. João Frois Caldeira & Marcelo Savino Portugal, 2010. "Long-Short Market Neutral and Index Tracking Strategies Based on Cointegrated Portfolios," Brazilian Review of Finance, Brazilian Society of Finance, vol. 8(4), pages 469-504.
    2. Ross Guest & Alan McLean, 1998. "New evidence on the expectations theory of the term structure of Australian Commonwealth Government Treasury yields," Applied Financial Economics, Taylor & Francis Journals, vol. 8(1), pages 81-87.
    3. Sandy Suardi, 2010. "Nonstationarity, cointegration and structural breaks in the Australian term structure of interest rates," Applied Economics, Taylor & Francis Journals, vol. 42(22), pages 2865-2879.

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