IDEAS home Printed from https://ideas.repec.org/a/ids/ijsuse/v9y2017i4p300-321.html
   My bibliography  Save this article

On the term structure of South African interest rates: cointegration and threshold adjustment

Author

Listed:
  • Bernard Njindan Iyke

Abstract

This paper explores the correlations of the short- and long-term interest rates through time in South Africa. Two time series techniques are utilised: the Kapetanios et al. (2003) nonlinear STAR unit root test and the asymmetric cointegration with threshold adjustment test of Enders and Siklos (2001). We find the interest rates (i.e., the SARB policy rate and the yield on long-term government bonds) to be cointegrated with fairly weak threshold adjustment. In addition, we find a distinct causal flow from the yield on long-term government bonds to the SARB policy rate with momentum equilibrium adjustment symmetry, indicating that linear error correction models may fit the yield curves in South Africa better.

Suggested Citation

  • Bernard Njindan Iyke, 2017. "On the term structure of South African interest rates: cointegration and threshold adjustment," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, vol. 9(4), pages 300-321.
    • Handle: RePEc:ids:ijsuse:v:9:y:2017:i:4:p:300-321
    as

    Download full text from publisher

    File URL: http://www.inderscience.com/link.php?id=87061
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Balke, Nathan S & Fomby, Thomas B, 1997. "Threshold Cointegration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-645, August.
    2. MacDonald, Ronald & Speight, Alan E H, 1988. "The Term Structure of Interest Rates in the UK," Bulletin of Economic Research, Wiley Blackwell, vol. 40(4), pages 287-299, October.
    3. Stock, James H & Watson, Mark W, 1988. "Variable Trends in Economic Time Series," Journal of Economic Perspectives, American Economic Association, vol. 2(3), pages 147-174, Summer.
    4. Inui, Tomohiko & Kim, YoungGak & Kwon, Hyeog Ug & Fukao, Kyoji, 2015. "Productivity Dynamics and Japan's Economic Growth: An Empirical Analysis Based on the Financial Statements Statistics of Corporations by Industry," Economic Review, Hitotsubashi University, vol. 66(4), pages 289-300, October.
    5. Enders, Walter & Siklos, Pierre L, 2001. "Cointegration and Threshold Adjustment," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 166-176, April.
    6. Caner, M. & Kilian, L., 2001. "Size distortions of tests of the null hypothesis of stationarity: evidence and implications for the PPP debate," Journal of International Money and Finance, Elsevier, vol. 20(5), pages 639-657, October.
    7. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February.
    8. Taylor, Mark P & Peel, David A & Sarno, Lucio, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Toward a Solution to the Purchasing Power Parity Puzzles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1015-1042, November.
    9. Joyce, Michael A.S. & Lildholdt, Peter & Sorensen, Steffen, 2010. "Extracting inflation expectations and inflation risk premia from the term structure: A joint model of the UK nominal and real yield curves," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 281-294, February.
    10. Estrella, Arturo & Mishkin, Frederic S., 1997. "The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank," European Economic Review, Elsevier, vol. 41(7), pages 1375-1401, July.
    11. Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-239, March.
    12. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    13. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    14. Sun, Changyou, 2011. "Price dynamics in the import wooden bed market of the United States," Forest Policy and Economics, Elsevier, vol. 13(6), pages 479-487, July.
    15. Granger, C W J & Lee, T H, 1989. "Investigation of Production, Sales and Inventory Relationships Using Multicointegration and Non-symmetric Error Correction Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(S), pages 145-159, Supplemen.
    16. Melvin Muzi Khomo & Meshach Jesse Aziakpono, 2007. "Forecasting Recession In South Africa: A Comparison Of The Yield Curve And Other Economic Indicators," South African Journal of Economics, Economic Society of South Africa, vol. 75(2), pages 194-212, June.
    17. Taylor, Mark P, 1992. "Modelling the Yield Curve," Economic Journal, Royal Economic Society, vol. 102(412), pages 524-537, May.
    18. Reuben A. Kessel, 1965. "The Cyclical Behavior of the Term Structure of Interest Rates," NBER Books, National Bureau of Economic Research, Inc, number kess65-1.
    19. Mewael F. Tesfaselassie & Eric Schaling & Sylvester Eijffinger, 2011. "Learning about the Term Structure and Optimal Rules for Inflation Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(8), pages 1685-1706, December.
    20. Gonzalo, Jesus & Pitarakis, Jean-Yves, 1998. "Specification via model selection in vector error correction models," Economics Letters, Elsevier, vol. 60(3), pages 321-328, September.
    21. McGough, Bruce & Rudebusch, Glenn D. & Williams, John C., 2005. "Using a long-term interest rate as the monetary policy instrument," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 855-879, July.
    22. Ben S. Bernanke, 1990. "On the predictive power of interest rates and interest rate spreads," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 51-68.
    23. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-836, July.
    24. McFadyen, James & Pickerill, Karen & Devaney, Mike, 1991. "The expectations hypothesis of the term structure: More evidence," Journal of Economics and Business, Elsevier, vol. 43(1), pages 79-85, February.
    25. Hugo Nel*, 1996. "The Term Structure of Interest Rates and Economic Activity in South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 64(3), pages 151-157, September.
    26. Chung-Hua Shen & Chien-Fu Chen & Li-Hsueh Chen, 2007. "An empirical study of the asymmetric cointegration relationships among the Chinese stock markets," Applied Economics, Taylor & Francis Journals, vol. 39(11), pages 1433-1445.
    27. Jeffrey C. Fuhrer, 1996. "Monetary Policy Shifts and Long-Term Interest Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(4), pages 1183-1209.
    28. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    29. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 245-274, April.
    30. Yau, Hwey-Yun & Nieh, Chien-Chung, 2009. "Testing for cointegration with threshold effect between stock prices and exchange rates in Japan and Taiwan," Japan and the World Economy, Elsevier, vol. 21(3), pages 292-300, August.
    31. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-126, February.
    32. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    33. repec:bla:jfinan:v:43:y:1988:i:5:p:1095-1112 is not listed on IDEAS
    34. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
    35. Wallace, Myles S & Warner, John T, 1993. "The Fisher Effect and the Term Structure of Interest Rates: Tests of Cointegration," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 320-324, May.
    36. Smile Dube & Yan Zhou, 2013. "South Africa¡¯s Short and Long Term Interest Rates: A Threshold Cointegration Analysis," Business and Economic Research, Macrothink Institute, vol. 3(1), pages 187-211, June.
    37. Bennett T. McCallum, 2005. "Monetary policy and the term structure of interest rates," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 91(Fall), pages 1-21.
    38. Estrella, Arturo & Hardouvelis, Gikas A, 1991. "The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-576, June.
    39. Enders, Walter & Granger, Clive W J, 1998. "Unit-Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(3), pages 304-311, July.
    40. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    41. James H. Stock & Mark W. Watson, 1989. "New Indexes of Coincident and Leading Economic Indicators," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409, National Bureau of Economic Research, Inc.
    42. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    43. Chen, Nai-Fu, 1991. "Financial Investment Opportunities and the Macroeconomy," Journal of Finance, American Finance Association, vol. 46(2), pages 529-554, June.
    44. McCallum, Bennett T., 1983. "A reconsideration of Sims' evidence concerning monetarism," Economics Letters, Elsevier, vol. 13(2-3), pages 167-171.
    45. Siklos, Pierre L. & Granger, Clive W.J., 1997. "Regime-Sensitive Cointegration With An Application To Interest-Rate Parity," Macroeconomic Dynamics, Cambridge University Press, vol. 1(3), pages 640-657, September.
    46. Clements, Michael P. & Galvão, Ana Beatriz C., 2003. "Testing The Expectations Theory Of The Term Structure Of Interest Rates In Threshold Models," Macroeconomic Dynamics, Cambridge University Press, vol. 7(4), pages 567-585, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Njindan Iyke, Bernard, 2015. "On The Term Structure of South African Interest Rates: Cointegration and Threshold Adjustment," MPRA Paper 67681, University Library of Munich, Germany.
    2. Njindan Iyke, Bernard, 2017. "Asymmetries in Yield Curves: Some Empirical Evidence from Ghana," MPRA Paper 79155, University Library of Munich, Germany.
    3. Iyke, Bernard Njindan, 2015. "Electricity consumption and economic growth in Nigeria: A revisit of the energy-growth debate," Energy Economics, Elsevier, vol. 51(C), pages 166-176.
    4. Zouheir Mighri & Faysal Mansouri, 2016. "Asymmetric price transmission within the Argentinean stock market: an asymmetric threshold cointegration approach," Empirical Economics, Springer, vol. 51(3), pages 1115-1149, November.
    5. Pelin ÖGE GÜNEY, 2013. "The Term Structure of Interest Rates: A Cointegration Analysis in the Non-Linear STAR Framework," Journal of Economics and Behavioral Studies, AMH International, vol. 5(12), pages 851-860.
    6. Jardet, Caroline, 2004. "Why did the term structure of interest rates lose its predictive power?," Economic Modelling, Elsevier, vol. 21(3), pages 509-524, May.
    7. Kremer, Manfred, 1999. "Die Kapitalmarktzinsen in Deutschland und den USA: Wie eng ist der Zinsverbund? Eine Anwendung der multivariaten Kointegrationsanalyse," Discussion Paper Series 1: Economic Studies 1999,02, Deutsche Bundesbank.
    8. Seiler, Volker, 2021. "China-to-FOB price transmission in the rare earth elements market and the end of Chinese export restrictions," Energy Economics, Elsevier, vol. 102(C).
    9. Zeno Rotondi, 2006. "The Macroeconomy and the Yield Curve: A Review of the Literature with Some New Evidence," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 65(2), pages 193-224, November.
    10. Martin T. Bohl & Pierre L. Siklos, 2004. "The Bundesbank's Inflation Policy and Asymmetric Behavior of the German Term Structure," Review of International Economics, Wiley Blackwell, vol. 12(3), pages 495-508, August.
    11. ngene, Geoffrey & Hassan, Mohammad Kabir, 2012. "Momentum and Nonlinear Price Discovery in Sovereign Credit Risk and Equity Markets of the Organization of Islamic Cooperation (OIC) Countries," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 46(2), pages 101-114.
    12. Beckmann, Joscha & Belke, Ansgar & Czudaj, Robert, 2014. "Regime-dependent adjustment in energy spot and futures markets," Economic Modelling, Elsevier, vol. 40(C), pages 400-409.
    13. Kuo, Shew-Huei, 2000. "An examination of the evolving relationship between interest rates of different maturities in Japan, and test of the expectations hypothesis of the term structure to ascertain the feasibility of using," ISU General Staff Papers 2000010108000014910, Iowa State University, Department of Economics.
    14. Andrew Phiri, 2020. "Structural changes in exchange rate-stock returns dynamics in South Africa: examining the role of crisis and new trading platform," Economic Change and Restructuring, Springer, vol. 53(1), pages 171-193, February.
    15. Zouheir Ahmed Mighri & Majid Ibrahim Alsaggaf, 2019. "Asymmetric Threshold Cointegration and Nonlinear Adjustment between Oil Prices and Financial Stress," International Journal of Energy Economics and Policy, Econjournals, vol. 9(3), pages 87-105.
    16. Beckmann, Joscha & Czudaj, Robert, 2013. "Is there a homogeneous causality pattern between oil prices and currencies of oil importers and exporters?," Energy Economics, Elsevier, vol. 40(C), pages 665-678.
    17. Sarno, Lucio & Thornton, Daniel L., 2003. "The dynamic relationship between the federal funds rate and the Treasury bill rate: An empirical investigation," Journal of Banking & Finance, Elsevier, vol. 27(6), pages 1079-1110, June.
    18. Mohammad J Alam & Raghbendra Jha, 2016. "Asymmetric threshold vertical price transmission in wheat and flour markets in Dhaka (Bangladesh): seemingly unrelated regression analysis," ASARC Working Papers 2016-03, The Australian National University, Australia South Asia Research Centre.
    19. Kühl, Michael, 2010. "Bivariate cointegration of major exchange rates, cross-market efficiency and the introduction of the Euro," Journal of Economics and Business, Elsevier, vol. 62(1), pages 1-19, January.
    20. Gonzalo, Jesùs & Pitarakis, Jean-Yves, 2005. "Threshold effects In multivariate error correction models," Discussion Paper Series In Economics And Econometrics 0501, Economics Division, School of Social Sciences, University of Southampton.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ids:ijsuse:v:9:y:2017:i:4:p:300-321. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sarah Parker (email available below). General contact details of provider: http://www.inderscience.com/browse/index.php?journalID=301 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.