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Functional Cointegration Test for Expectation Hypothesis of the Term Structure of Interest Rates in China

Author

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  • Yizheng Fu

    (Xiamen University of Technology)

  • Zhifang Su

    (Huaqiao University)

  • Aihua Lin

    (Minnan Normal University)

Abstract

It is of great significance to empirical test the expectation hypothesis of the term structure of interest rates. Most existing empirical literature using cointegration test with monthly data. With the easier access to high frequency data, using high frequency data to empirical test can reduce information loss and get more reliable conclusion. This paper proposes a new method which is called functional cointegration test and empirical test the expectation theory hypothesis using Chinese treasure yield daily data which contains 3001 trading days from 2011 to 2022 with 14 different maturities. The empirical results show that all 91 groups of different long-term and short-term interest rates combinations have significant cointegration relationship. The expectation theory hypothesis valid for all long-term and short-term interest rates combinations in China. This paper provides a new functional data analysis perspective for the empirical test of the expectation theory hypothesis, and also explores the application of functional data analysis in economic field.

Suggested Citation

  • Yizheng Fu & Zhifang Su & Aihua Lin, 2024. "Functional Cointegration Test for Expectation Hypothesis of the Term Structure of Interest Rates in China," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 31(4), pages 799-820, December.
    • Handle: RePEc:kap:apfinm:v:31:y:2024:i:4:d:10.1007_s10690-023-09431-w
    DOI: 10.1007/s10690-023-09431-w
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