Mean-Variance Cointegration and the Expectations Hypothesis

Till Strohsal and Enzo Weber

No 442, University of Regensburg Working Papers in Business, Economics and Management Information Systems from University of Regensburg, Department of Economics

Abstract: The present work provides an economic explanation of a well-known (seeming) violation of the expectations hypothesis of the term structure (EHT) - the frequent finding of unit roots in interest rate spreads. We derive from EHT that the nonstationarity stems from the holding premium, which is hence cointegrated with the spread. We model the premium as being proportional to the integrated variance of excess returns and further propose a cointegration test. Simulating the distribution of the test statistic we actually find cointegration relations between premia and spreads in US data. The EHT appears to perform better than previously thought.

Keywords: Expectations Hypothesis; Holding Premium; Persistence; Cointegration; GARCH (search for similar items in EconPapers)
JEL-codes: C32 E43 (search for similar items in EconPapers)
Date: 2010-05-31
New Economics Papers: this item is included in nep-fmk, nep-mac and nep-mon
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Related works:
Journal Article: Mean-variance cointegration and the expectations hypothesis (2014)
Working Paper: Mean-variance cointegration and the expectations hypothesis (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:bay:rdwiwi:15152

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