Fractional cointegration in US term spreads

Guglielmo Maria Caporale and Luis Gil-Alana

Applied Economics Letters, 2012, vol. 19, issue 5, 431-434

Abstract: This article examines the stochastic properties of US term spreads with parametric and semi-parametric fractional integration techniques. Since the observed data (rather than the estimated residuals from a cointegrating regression) are used for the analysis, standard methods can be applied. The results indicate that US Treasury maturity rates are I (1) in most cases, although the order of integration decreases with maturity. Furthermore, mean reversion occurs for the 5-, 7- and 10-year rates as well as for several term spreads, suggesting that the expectation hypothesis of the term structure is supported empirically in these cases.

Date: 2012
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Working Paper: Fractional Cointegration in US Term Spreads (2010)
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DOI: 10.1080/13504851.2011.581205

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