Mean-variance cointegration and the expectations hypothesis

Till Strohsal and Enzo Weber

No 2011-007, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

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 spreads and premia in US data.

Keywords: expectations hypothesis; holding premium; persistence; cointegration; GARCH (search for similar items in EconPapers)
JEL-codes: C32 E43 (search for similar items in EconPapers)
Date: 2011
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Related works:
Journal Article: Mean-variance cointegration and the expectations hypothesis (2014)
Working Paper: Mean-Variance Cointegration and the Expectations Hypothesis (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:sfb649:sfb649dp2011-007

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