Domestic variance and international comovement bonds tests of interest rates |
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| Institution: | 1. School of Business, University of Southern Maine, 96 Falmouth Street, Portland, ME 04104-9300, USA;1. Department of Environmental Science and Policy, University of Southern Maine, 106 Bailey Hall, Gorham, ME 04038, USA;2. ecomaine, 64 Blueberry Road, Portland, ME 04102, USA;1. Department of Environmental Science & Policy, 106 Bailey Hall, Gorham, ME 04038 USA;2. Muskie School of Public Service, Bedford Street, Portland, ME 04101, USA;1. Muskie School of Public Service, University of Southern Maine, Portland, ME, USA;2. Division of Applied Health Care Delivery Science, Department of Medicine, Maine Medical Center, Portland, ME, USA;3. Maine-Dartmouth Family Medicine Residency, MaineGeneral Medical Center, Waterville, ME, USA |
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| Abstract: | This article demonstrates that long rates exhibit both domestic excess variance and international excess comovement compared to fundamental yields derived from short rates under the rational expectations theory of term structure. The results are consistent for all countries sampled: the US, UK, Canada, Germany, and Japan. Probing deeper, long rates are found to “overreact” to domestic expected future inflation and/or short real rates both of which are the underlying components of the short nominal rate according to the Fisher hypothesis. Since inflation rates as well as short real rates are highly correlated between countries, the excess volatility in long rates translates into excess covariance (“co-overreact”) internationally. |
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