When Unit Roots Matter: Excess Volatility and Excess Smoothness of Long-Term Interest Rates

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Abstract

This paper re-examines volatility tests of the expectations model of the term structure of interest rates. In a multivariate vector autoregression (var) including interest rates, prices, money and output, we find that the long-term interest rate overreacts to all transitory shocks, and underreacts to all permanent shocks, irrespective of the number of unit roots and the cointegration structure in the system.
Original languageEnglish
Pages (from-to)669-694
JournalJournal of Empirical Finance
Volume8
DOIs
Publication statusPublished - 1 Jan 2001

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