THE TERM STRUCTURE OF INTEREST RATES AS A COINTEGRATED SYSTEM: EMPIRICAL EVIDENCE FROM THE EUROCURRENCY MARKET

In this paper I examine the term structure of Eurocurrency interest rates from six countries (with maturities of one, two, three, and six months) using unit root tests and cointegration tests that are robust to departures from independent and identically distributed errors. The main conclusions are: (1) Eurocurrency interest rates have one (and only one) unit root when viewed individually, and (2) for each of the countries examined, Eurocurrency interest rates are cointegrated—with one equilibrium relationship—when viewed jointly. These conclusions are consistent with the weak form of the efficient market hypothesis and suggest that in efficient markets arbitrage generally prevents rates on different maturities of a given asset from drifting too far for an extended period.     

THE TERM PREMIA RELATIONSHIP IMPLICIT IN THE TERM STRUCTURE OF TREASURY BILLS

This paper considers a single coefficient representation of the term premia relationship that appears in treasury bill yield curves. Term premia are defined as positive or negative maturity-dependent differentials versus the instantaneous nominal spot rate. The term premia function is developed in the context of the Cox, Ingersoll, and Ross [ 3 ] Risk-Averse Preferred Habitat Model and proxies for the degree of risk aversion exhibited by the universe of treasury bill investors at a point in time. Empirical results indicate that term premia are influenced by a set of macroeconomic variables in the expected manner.     

A VARIANCE DECOMPOSITION ANALYSIS OF THE INFORMATION IN THE TERM STRUCTURE

Based on a market efficiency assumption, we use variance decomposition analysis to separate information in the term structure on expected future spot rates from information on time-varying term premia and to examine the market's ability to forecast both future rate changes and excess returns on long versus short securities. We find that fluctuations in the slope of the yield curve are due more to changing term premia than to fluctuations in expected future spot rates and that the market correctly predicts about 40 percent of the month-to-month changes in spot rates, a considerably higher percentage than that found by previous studies.     

PREDICTIVE POWER OF THE TERM STRUCTURE IN AUSTRALIA IN THE LATE 1980'S: A NOTE

The Market Expectations Theory of the Term Structure of Interest Rates is tested using Wednesday yields on 13 week and 26 week treasury notes and 90 and 180 day bank accepted bills for the period 3 December 1986 to 13 March 1991 obtained from the Reserve Bank of Australia. In ordinary least squares regression based tests the Market Expectations Theory of the Term Structure of Interest Rates is accepted for bank accepted bills but rejected for treasury notes. Augmented Dickey Fuller unit root tests provide evidence of non-stationarity in the variables; a possibility often ignored in Australian studies. Although the unit root tests are generally consistent with the existence of one unit root, residual based cointegration tests between the forward rate and spot rate are not consistent with cointegration. This suggests that the prior expectations theory results may be a result of spurious regression. Perhaps a more complex model is required, coupled with tests which take account of non-stationary time series.