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Near Unit Roots And The Predictive Power Of Yield Spreads For Changes In Long-Term Interest Rates

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  • Markku Lanne

Abstract

The ability of yield spreads to predict changes in long-term interest rates implied by the expectations hypothesis is usually rejected. It is suggested that this rejection is often caused by high persistence in the spread when standard inference is employed. Instead, the asymptotically valid method of Cavanagh et al. (1995) is applied to monthly U.S. data from 1952:1-1991:2. The persistence of the spreads seems to have varied over time, and in subsample analysis, the expectations hypothesis cannot be rejected at the long end of the maturity spectrum. © 1999 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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  • Markku Lanne, 1999. "Near Unit Roots And The Predictive Power Of Yield Spreads For Changes In Long-Term Interest Rates," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 393-398, August.
    • Handle: RePEc:tpr:restat:v:81:y:1999:i:3:p:393-398
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    References listed on IDEAS

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    Cited by:

    1. Sébastien Morin, 2004. "Ruptures structurelles sur les marchés action et obligataire américains : preuve empirique à partir de la méthode de Saikkönen," Economie & Prévision, La Documentation Française, vol. 166(5), pages 87-98.
    2. repec:zbw:bofrdp:1999_020 is not listed on IDEAS
    3. Hansen, Peter Reinhard, 2003. "Structural changes in the cointegrated vector autoregressive model," Journal of Econometrics, Elsevier, vol. 114(2), pages 261-295, June.
    4. 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.
    5. Bulkley, George & Giordani, Paolo, 2011. "Structural breaks, parameter uncertainty, and term structure puzzles," Journal of Financial Economics, Elsevier, vol. 102(1), pages 222-232, October.
    6. 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.
    7. Markku Lanne, 2003. "Testing the Expectations Hypothesis of the Term Structure of Interest Rates in the Presence of a Potential Regime Shift," Manchester School, University of Manchester, vol. 71(s1), pages 54-67, September.
    8. Guidolin, Massimo & Timmermann, Allan, 2009. "Forecasts of US short-term interest rates: A flexible forecast combination approach," Journal of Econometrics, Elsevier, vol. 150(2), pages 297-311, June.
    9. Markku Lanne, 2003. "Testing the Expectations Hypothesis of the Term Structure of Interest Rates in the Presence of a Potential Regime Shift," Manchester School, University of Manchester, vol. 71(s1), pages 54-67, September.
    10. Karsten Schweikert, 2022. "Detecting Multiple Structural Breaks in Systems of Linear Regression Equations with Integrated and Stationary Regressors," Papers 2201.05430, arXiv.org, revised Sep 2024.
    11. Haug Alfred A & Siklos Pierre L, 2006. "The Behavior of Short-Term Interest Rates: International Evidence of Non-Linear Adjustment," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(4), pages 1-34, December.
    12. Guidolin, Massimo & Thornton, Daniel L., 2018. "Predictions of short-term rates and the expectations hypothesis," International Journal of Forecasting, Elsevier, vol. 34(4), pages 636-664.
    13. Alfred A. Haug & Pierre L. Siklos, 2002. "The Term Spread International Evidence of Non-Linear Adjustment," Working Papers 2002_08, York University, Department of Economics, revised Jul 2004.
    14. Sébastien Morin, 2004. "Ruptures structurelles sur les marchés action et obligataire américains : preuve empirique à partir de la méthode de Saikkönen," Économie et Prévision, Programme National Persée, vol. 166(5), pages 87-98.
    15. Sarno, Lucio & Thornton, Daniel L & Valente, Giorgio, 2005. "Federal Funds Rate Prediction," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(3), pages 449-471, June.
    16. Frédérique Bec & Charbel Bassil, 2009. "Federal Funds Rate Stationarity: New Evidence," Economics Bulletin, AccessEcon, vol. 29(2), pages 867-872.
    17. Sugita, Katsuhiro & 杉田, 勝弘, 2006. "Time Series Analysis of the Expectations Hypothesis for the Japanese Term Structure of Interest Rates in the Presence of Multiple Structural Breaks," Discussion Papers 2006-15, Graduate School of Economics, Hitotsubashi University.
    18. Peter Reinhard Hansen, 2000. "Structural Breaks in the Cointegrated Vector Autoregressive Model," Econometric Society World Congress 2000 Contributed Papers 1240, Econometric Society.
    19. Balázs Romhányi, 2005. "A learning hypothesis of the term structure of interest rates," Macroeconomics 0503001, University Library of Munich, Germany.

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