Reconciling interest rates evidence with theory: Rejecting unit roots when the HD(1) is a competing alternative

Alessandro Palandri

Journal of Banking & Finance, 2024, vol. 161, issue C

Abstract: The paper introduces the HD(1), a Markovian process of order one with reversion rates that are faster the farther the process is from equilibrium. The aHD(1) approximation is introduced to allow for an estimation-calibration procedure based on available ARMA routines. Critical values of unit root tests with aHD(1) alternative are tabulated for the signed likelihood-ratio statistic. Revisiting the non-stationarity of interest rates stylized fact, the aHD(1) is found to be preferred to ARMA, SETAR and RCA and the resulting tests to reject the unit root hypothesis for all rates and yields considered.

Keywords: Interest rates; Bond yields; Hyperbolic reversion; Unit root test; Critical values (search for similar items in EconPapers)
JEL-codes: C12 C22 G12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:161:y:2024:i:c:s0378426624000335

DOI: 10.1016/j.jbankfin.2024.107113

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