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Nonlinear Dynamics in Term Structure of Interest Rates: Evidence from the Euro Area

Yıl 2015, Cilt: 23 Sayı: 26, 79 - 98, 14.10.2015

Öz

The long run relationship between short term and long term interest rates has drawn much attention since European sovereign debt crisis in 2011-2012. Motivated by this observation, this paper investigates the expectations hypothesis (EH) of term structure of interest rates in the euro area for the 2000:01-2014:04 period. By using the nonlinear cointegration approach developed by Kapetanios et al. (2006), we find that the long run relationship between long term and short term interest rates is stable with nonlinear adjustment. Our results provide evidence in favour of the EH. Moreover, the findings suggest that nonlinear mean reversion effects of the cointegrating residuals increase with the maturity of interest rates.

Kaynakça

  • Anderson, H.M. (1997), “Transaction costs and non-linear adjustment towards equilibrium in the US treasury bill market”, Oxford Bulletin of Economics and Statistics, 59, 465-484.
  • Bachmeier, L. (2002), “Is the term structure nonlinear? A semiparametric investigation”, Applied Economics Letters, 9, 151-153.
  • Brüggemann, R. & H. Lütkepohl (2005), “Uncovered interest rate parity and the expectations hypothesis of the term structure: empirical results for the US and Europe,” SFB 649 Discussion paper No 2005, 035.
  • Campbell, J.Y. & R.J. Shiller (1987), “Cointegration and tests of present value models”, Journal of Political Economy, 95, 1062-1088.
  • Campbell, J.Y. & R.J. Shiller (1991), “Yield spreads and interest rate movements: A bird’s eye view”, Review of Economic Studies, 58, 495-514.
  • Clarida, R.H. & L. Sarno & M.P. Taylor & G. Valente (2006), “The role of asymmetries and regime shifts in the term structure of interest rates”, The Journal of Business, 79, 1193-1224.
  • Clements, M.P. & A.B. Galvao (2003), “Testing the expectations theory of the term structure of interest rates in threshold models”, Macroeconomic Dynamics, 7, 567-85.
  • Cuthbertson, K. (1996), “The expectations hypothesis of the term structure: the UK interbank market”, The Economic Journal, 106, 578-592.
  • Dickey, D.A. & W.A. Fuller (1979), “Distribution of the estimates for autoregressive time series with a unit root”, Journal of the American Statistical Association, 74, 427–31.
  • Durré, A. (2006), “The liquidity premium in the money market: a comparison of the German mark period and the euro area”, German Economic Review, 7, 163-87.
  • Dwyer, G.P. & P. Locke & W. Yu (1996), “Index arbitrage and nonlinear dynamics between the SP500 futures and cash”, Review of Financial Studies, 9, 301-32.
  • Enders, W. & C.W.J. Granger (1998), “Unit root tests and asymmetric adjustment with an example using the term structure of interest rates”, Journal of Business and Economic Statistics, 16, 304-11.
  • Engsted, T. & C. Tanggaard (1994), “A cointegration analysis of Danish zero-coupon bond yields”, Applied Financial Economics, 4, 265–78.
  • Gerlach, S. & F. Smets (1997), “The term structure of euro-rates: some evidence in support of the expectations hypothesis”, Journal of International Money and Finance, 16, 305–21.
  • Hall, S.G. & H.M. Anderson & C.W.J. Granger (1992), “A cointegration analysis of treasury bill yields”, Review of Economics and Statistics, 74, 116–26.
  • Hansen, B.E. & B. Seo (2002), “Testing for two-regime threshold cointegration in vector error-correction models”, Journal of Econometrics, 110, 293-318.
  • Johansen, S. & K. Juselius (1990), “Maximum likelihood estimation and inference on cointegration-with applications to the demand for money”, Oxford Bulletin of Economics and Statistics, 52, 169-210.
  • Kapetanios, G. & Y. Shin & A. Snell (2003), “Testing for a unit root in the nonlinear STAR framework”, Journal of Econometrics, 112, 359–79.
  • Kapetanios, G. & Y. Shin & A. Snell (2006), “Testing for cointegration in nonlinear smooth transition error correction models”, Econometric Theory, 22, 279-303.
  • Koukouritakis, M. (2013), “Expectations hypothesis in the context of debt crisis: Evidence from five major EU countries”, Research in Economics, 67, 243-58.
  • Koukouritakis, M. & L. Michelis (2008), “The term structure of interest rates in the 12 newest EU countries”, Applied Economics, 40, 479−90.
  • Maki, D. (2006), “Non-linear adjustment in the term structure of interest rates: a cointegration analysis in the non-linear STAR framework”, Applied Financial Economics, 16, 1301-07.
  • Martens, M. & P. Kofman & T.C.F. Vorst (1998), “A threshold error-correction model for intraday futures and index returns”, Journal of Applied Econometrics, 13, 245–63.
  • Mili, M. & J.M. Sahut & F. Teulon (2012), “New evidence of the expectation hypothesis of interest rates: a flexible nonlinear approach”, Applied Financial Economics, 22, 165-76.
  • Mustafa, M. & M. Rahman (1995), “Cointegration between US short-term and long-term interest rates (both nominal and real)”, Applied Financial Economics, 5, 323-27.
  • Musti, S. & R.L. D’Ecclesia (2008), “Term structure of interest rates and the expectations hypothesis: the euro area”, European Journal of Operational Research, 185, 1596-1606.
  • Shiller, R.J. (1990), “The term structure of interest rates” in B. M. Friedman and F. H. Hahn (eds), Handbook of Monetary Economics, Vol. 1, Amsterdam: North-Holland, 627–722.
  • Siklos, P.L. & M.E. Wohar (1996), “Cointegration and the term structure: A multicountry comparison”, International Review of Economics and Finance, 5, 21–34.
  • Taylor, M.P. (1992), “Modelling the yield curve”, The Economic Journal, 102, 524-37.
  • Tsay, R.S. (1998), “Testing and modelling multivariate threshold models”, Journal of the American Statistical Association, 93, 1188–1202.
  • Wolters, J. (1998), “Cointegration and German bond yields”, Applied Economics Letters, 5, 497–502.

Nonlinear Dynamics in Term Structure of Interest Rates: Evidence from the Euro Area

Yıl 2015, Cilt: 23 Sayı: 26, 79 - 98, 14.10.2015

Öz

The long run relationship between short term and long term interest rates has drawn much attention since European sovereign debt crisis in 2011-2012. Motivated by this observation, this paper investigates the expectations hypothesis (EH) of term structure of interest rates in the euro area for the 2000:01-2014:04 period. By using the nonlinear cointegration approach developed by Kapetanios et al. (2006), we find that the long run relationship between long term and short term interest rates is stable with nonlinear adjustment. Our results provide evidence in favour of the EH. Moreover, the findings suggest that nonlinear mean reversion effects of the cointegrating residuals increase with the maturity of interest rates.

Kaynakça

  • Anderson, H.M. (1997), “Transaction costs and non-linear adjustment towards equilibrium in the US treasury bill market”, Oxford Bulletin of Economics and Statistics, 59, 465-484.
  • Bachmeier, L. (2002), “Is the term structure nonlinear? A semiparametric investigation”, Applied Economics Letters, 9, 151-153.
  • Brüggemann, R. & H. Lütkepohl (2005), “Uncovered interest rate parity and the expectations hypothesis of the term structure: empirical results for the US and Europe,” SFB 649 Discussion paper No 2005, 035.
  • Campbell, J.Y. & R.J. Shiller (1987), “Cointegration and tests of present value models”, Journal of Political Economy, 95, 1062-1088.
  • Campbell, J.Y. & R.J. Shiller (1991), “Yield spreads and interest rate movements: A bird’s eye view”, Review of Economic Studies, 58, 495-514.
  • Clarida, R.H. & L. Sarno & M.P. Taylor & G. Valente (2006), “The role of asymmetries and regime shifts in the term structure of interest rates”, The Journal of Business, 79, 1193-1224.
  • Clements, M.P. & A.B. Galvao (2003), “Testing the expectations theory of the term structure of interest rates in threshold models”, Macroeconomic Dynamics, 7, 567-85.
  • Cuthbertson, K. (1996), “The expectations hypothesis of the term structure: the UK interbank market”, The Economic Journal, 106, 578-592.
  • Dickey, D.A. & W.A. Fuller (1979), “Distribution of the estimates for autoregressive time series with a unit root”, Journal of the American Statistical Association, 74, 427–31.
  • Durré, A. (2006), “The liquidity premium in the money market: a comparison of the German mark period and the euro area”, German Economic Review, 7, 163-87.
  • Dwyer, G.P. & P. Locke & W. Yu (1996), “Index arbitrage and nonlinear dynamics between the SP500 futures and cash”, Review of Financial Studies, 9, 301-32.
  • Enders, W. & C.W.J. Granger (1998), “Unit root tests and asymmetric adjustment with an example using the term structure of interest rates”, Journal of Business and Economic Statistics, 16, 304-11.
  • Engsted, T. & C. Tanggaard (1994), “A cointegration analysis of Danish zero-coupon bond yields”, Applied Financial Economics, 4, 265–78.
  • Gerlach, S. & F. Smets (1997), “The term structure of euro-rates: some evidence in support of the expectations hypothesis”, Journal of International Money and Finance, 16, 305–21.
  • Hall, S.G. & H.M. Anderson & C.W.J. Granger (1992), “A cointegration analysis of treasury bill yields”, Review of Economics and Statistics, 74, 116–26.
  • Hansen, B.E. & B. Seo (2002), “Testing for two-regime threshold cointegration in vector error-correction models”, Journal of Econometrics, 110, 293-318.
  • Johansen, S. & K. Juselius (1990), “Maximum likelihood estimation and inference on cointegration-with applications to the demand for money”, Oxford Bulletin of Economics and Statistics, 52, 169-210.
  • Kapetanios, G. & Y. Shin & A. Snell (2003), “Testing for a unit root in the nonlinear STAR framework”, Journal of Econometrics, 112, 359–79.
  • Kapetanios, G. & Y. Shin & A. Snell (2006), “Testing for cointegration in nonlinear smooth transition error correction models”, Econometric Theory, 22, 279-303.
  • Koukouritakis, M. (2013), “Expectations hypothesis in the context of debt crisis: Evidence from five major EU countries”, Research in Economics, 67, 243-58.
  • Koukouritakis, M. & L. Michelis (2008), “The term structure of interest rates in the 12 newest EU countries”, Applied Economics, 40, 479−90.
  • Maki, D. (2006), “Non-linear adjustment in the term structure of interest rates: a cointegration analysis in the non-linear STAR framework”, Applied Financial Economics, 16, 1301-07.
  • Martens, M. & P. Kofman & T.C.F. Vorst (1998), “A threshold error-correction model for intraday futures and index returns”, Journal of Applied Econometrics, 13, 245–63.
  • Mili, M. & J.M. Sahut & F. Teulon (2012), “New evidence of the expectation hypothesis of interest rates: a flexible nonlinear approach”, Applied Financial Economics, 22, 165-76.
  • Mustafa, M. & M. Rahman (1995), “Cointegration between US short-term and long-term interest rates (both nominal and real)”, Applied Financial Economics, 5, 323-27.
  • Musti, S. & R.L. D’Ecclesia (2008), “Term structure of interest rates and the expectations hypothesis: the euro area”, European Journal of Operational Research, 185, 1596-1606.
  • Shiller, R.J. (1990), “The term structure of interest rates” in B. M. Friedman and F. H. Hahn (eds), Handbook of Monetary Economics, Vol. 1, Amsterdam: North-Holland, 627–722.
  • Siklos, P.L. & M.E. Wohar (1996), “Cointegration and the term structure: A multicountry comparison”, International Review of Economics and Finance, 5, 21–34.
  • Taylor, M.P. (1992), “Modelling the yield curve”, The Economic Journal, 102, 524-37.
  • Tsay, R.S. (1998), “Testing and modelling multivariate threshold models”, Journal of the American Statistical Association, 93, 1188–1202.
  • Wolters, J. (1998), “Cointegration and German bond yields”, Applied Economics Letters, 5, 497–502.
Toplam 31 adet kaynakça vardır.

Ayrıntılar

Birincil Dil İngilizce
Bölüm Makaleler
Yazarlar

Ayşen Araç Bu kişi benim

Yayımlanma Tarihi 14 Ekim 2015
Gönderilme Tarihi 29 Ağustos 2015
Yayımlandığı Sayı Yıl 2015 Cilt: 23 Sayı: 26

Kaynak Göster

APA Araç, A. (2015). Nonlinear Dynamics in Term Structure of Interest Rates: Evidence from the Euro Area. Sosyoekonomi, 23(26), 79-98. https://doi.org/10.17233/se.62057
AMA Araç A. Nonlinear Dynamics in Term Structure of Interest Rates: Evidence from the Euro Area. Sosyoekonomi. Ekim 2015;23(26):79-98. doi:10.17233/se.62057
Chicago Araç, Ayşen. “Nonlinear Dynamics in Term Structure of Interest Rates: Evidence from the Euro Area”. Sosyoekonomi 23, sy. 26 (Ekim 2015): 79-98. https://doi.org/10.17233/se.62057.
EndNote Araç A (01 Ekim 2015) Nonlinear Dynamics in Term Structure of Interest Rates: Evidence from the Euro Area. Sosyoekonomi 23 26 79–98.
IEEE A. Araç, “Nonlinear Dynamics in Term Structure of Interest Rates: Evidence from the Euro Area”, Sosyoekonomi, c. 23, sy. 26, ss. 79–98, 2015, doi: 10.17233/se.62057.
ISNAD Araç, Ayşen. “Nonlinear Dynamics in Term Structure of Interest Rates: Evidence from the Euro Area”. Sosyoekonomi 23/26 (Ekim 2015), 79-98. https://doi.org/10.17233/se.62057.
JAMA Araç A. Nonlinear Dynamics in Term Structure of Interest Rates: Evidence from the Euro Area. Sosyoekonomi. 2015;23:79–98.
MLA Araç, Ayşen. “Nonlinear Dynamics in Term Structure of Interest Rates: Evidence from the Euro Area”. Sosyoekonomi, c. 23, sy. 26, 2015, ss. 79-98, doi:10.17233/se.62057.
Vancouver Araç A. Nonlinear Dynamics in Term Structure of Interest Rates: Evidence from the Euro Area. Sosyoekonomi. 2015;23(26):79-98.