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Reconciling interest rates evidence with theory: Rejecting unit roots when the HD(1) is a competing alternative

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  • Palandri, Alessandro

Abstract

The paper introduces the HD(1), a Markovian process of order one with reversion rates that are faster the farther the process is from equilibrium. The aHD(1) approximation is introduced to allow for an estimation-calibration procedure based on available ARMA routines. Critical values of unit root tests with aHD(1) alternative are tabulated for the signed likelihood-ratio statistic. Revisiting the non-stationarity of interest rates stylized fact, the aHD(1) is found to be preferred to ARMA, SETAR and RCA and the resulting tests to reject the unit root hypothesis for all rates and yields considered.

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  • Palandri, Alessandro, 2024. "Reconciling interest rates evidence with theory: Rejecting unit roots when the HD(1) is a competing alternative," Journal of Banking & Finance, Elsevier, vol. 161(C).
    • Handle: RePEc:eee:jbfina:v:161:y:2024:i:c:s0378426624000335
    DOI: 10.1016/j.jbankfin.2024.107113
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    More about this item

    Keywords

    Interest rates; Bond yields; Hyperbolic reversion; Unit root test; Critical values;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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