An Empirical Study on the Lapse Rate: The Cointegration Approach

Weiyu Kuo, Chenghsien Tsai and Wei‐Kuang Chen

Journal of Risk & Insurance, 2003, vol. 70, issue 3, 489-508

Abstract: We use the cointegration technique to reexamine the contending lapse rate hypotheses: the emergency fund hypothesis and the interest rate hypothesis. We find that the unemployment rate affects the lapse rate in both the long and short run, whereas the interest rate causes variations in the lapse rate mainly in the long run. This evidence seems to be in favor of the emergency fund hypothesis. However, according to the impulse response analysis of the estimated error‐correction model, the interest rate overwhelms the unemployment rate on the overall impact on the dynamics of lapse rate. In other words, the interest rate hypothesis is favored against the emergency fund hypothesis in the sense that the interest rate is more economically significant than the unemployment rate in explaining the lapse rate dynamics.

Date: 2003
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