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Fractional cointegration in US term spreads

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  • Guglielmo Maria Caporale
  • Luis Alberiko Gil-Alana

Abstract

This article examines the stochastic properties of US term spreads with parametric and semi-parametric fractional integration techniques. Since the observed data (rather than the estimated residuals from a cointegrating regression) are used for the analysis, standard methods can be applied. The results indicate that US Treasury maturity rates are I (1) in most cases, although the order of integration decreases with maturity. Furthermore, mean reversion occurs for the 5-, 7- and 10-year rates as well as for several term spreads, suggesting that the expectation hypothesis of the term structure is supported empirically in these cases.

Suggested Citation

  • Guglielmo Maria Caporale & Luis Alberiko Gil-Alana, 2012. "Fractional cointegration in US term spreads," Applied Economics Letters, Taylor & Francis Journals, vol. 19(5), pages 431-434, March.
    • Handle: RePEc:taf:apeclt:v:19:y:2012:i:5:p:431-434
    DOI: 10.1080/13504851.2011.581205
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    1. N. Gregory Mankiw & Lawrence H. Summers, 1984. "Do Long-Term Interest Rates Overreact to Short-Term Interest Rates?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(1), pages 223-248.
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    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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