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Mean-variance cointegration and the expectations hypothesis

Till Strohsal and Enzo Weber

Quantitative Finance, 2014, vol. 14, issue 11, 1983-1997

Abstract: The present paper sheds further light on a well-known (alleged) violation of the expectations hypothesis of the term structure (EHT): the frequent finding of unit roots in interest rate spreads. We show that the EHT implies (i) that the nonstationarity stems from the holding premium, which is hence (ii) cointegrated with the spread. In a stochastic discount factor framework, we model the premium as being driven by the integrated variance of excess returns. Introducing the concept of mean-variance cointegration, we actually find cointegration relations between the conditional first and second moment of US bond data.

Date: 2014
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Related works:
Working Paper: Mean-Variance Cointegration and the Expectations Hypothesis (2011) Downloads
Working Paper: Mean-Variance Cointegration and the Expectations Hypothesis (2010) Downloads
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