Do Interest Rates Follow Unit-Root Processes? Evidence from Cross-Maturity Treasury Bill Yields

Do Interest Rates Follow Unit-Root Processes? Evidence from Cross-Maturity Treasury Bill Yields Abstract. It is widely reported in the literature that interest rates follow integrated processes. Many empirical studies have, in fact, taken this result as a maintained hypothesis. This article demonstrates that the failure to reject the hypothesis that interest rates contain a unit root may be due to the severe power problem of standard test procedures in small samples. We analyze a panel of cross-maturity Treasury-bill yield series by employing a panel-based test. This test exploits cross-maturity variations of the data to improve estimation efficiency and is more powerful than standard tests for unit roots. The critical values of the test statistics are computed by Monte Carlo simulations tailored to our samples. It is found that the null hypothesis that each yield series contains a unit root can be decisively rejected. Our findings cast some doubt on previous studies that rely on the nonstationarity assumption of interest rates. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Do Interest Rates Follow Unit-Root Processes? Evidence from Cross-Maturity Treasury Bill Yields

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Publisher
Springer Journals
Copyright
Copyright © 1997 by 1997 Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1008244721492
Publisher site
See Article on Publisher Site

Abstract

Abstract. It is widely reported in the literature that interest rates follow integrated processes. Many empirical studies have, in fact, taken this result as a maintained hypothesis. This article demonstrates that the failure to reject the hypothesis that interest rates contain a unit root may be due to the severe power problem of standard test procedures in small samples. We analyze a panel of cross-maturity Treasury-bill yield series by employing a panel-based test. This test exploits cross-maturity variations of the data to improve estimation efficiency and is more powerful than standard tests for unit roots. The critical values of the test statistics are computed by Monte Carlo simulations tailored to our samples. It is found that the null hypothesis that each yield series contains a unit root can be decisively rejected. Our findings cast some doubt on previous studies that rely on the nonstationarity assumption of interest rates.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Sep 29, 2004

References

  • A Cointegration Analysis of Treasury Bill Yields
    Hall, A.D.; Anderson, H.M.; Granger, C.W.J.

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