Nonlinear Adjustment in US Bond Yields: an Empirical Analysis with Conditional Heteroskedasticity
Riccardo (Jack) Lucchetti () and
Giulio Palomba ()
MPRA Paper from University Library of Munich, Germany
Starting from the work by Campbell and Shiller (1987), empirical analysis of interest rates has been conducted in the framework of cointegration. However, parts of this approach have been questioned recently, as the adjustment mechanism may not follow a simple linear rule; another line of criticism points out that stationarity of the spreads is difficult to maintain empirically. In this paper, we analyse data on US bond yields by means of an augmented VAR specification which approximates a generic nonlinear adjustment model. We argue that nonlinearity captures macro information via the shape of the yield curve and thus provides an alternative explanation for some findings recently appeared in the literature. Moreover, we show how conditional heteroskedasticity can be taken into account via GARCH specifications for the conditional variance, either univariate and multivariate.
Keywords: interest rates; cointegration; nonlinear adjustment; conditional heteroskedasticity (search for similar items in EconPapers)
JEL-codes: C51 C32 E43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets, nep-mac and nep-ore
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