Hostname: page-component-7b7567c8c-tnzcf Total loading time: 0 Render date: 2026-11-15T08:05:41.804Z Has data issue: false hasContentIssue false
  • English
  • Français

The Treasury Yield Curve as a Cointegrated System

Published online by Cambridge University Press:  06 April 2009

Michael G. Bradley and
Stephen A. Lumpkin
Get accessRights & Permissions [Opens in a new window]

Abstract

This paper examines the temporal relationship between interest rates on Treasury securities ranging in maturity from three months to 30 years. We find strong empirical support that the seven Treasury rates selected are cointegrated, a conclusion that is insensitive to the normalization chosen. In particular, the hypothesis of noncointegration is rejected decisively regardless of the rate selected as the dependent variable in the cointegrating equation. To determine whether this information can be used to improve forecasts of Treasury rates, the seven rates are forecasted with a corresponding errorcorrection model that is shown to outperform an augmented VAR model that ignores the cointegration of the rates. The results are consistent with the belief that arbitrage limits the extent to which rates on different maturities of a given security diverge. In addition, the results confirm the appropriateness of imposing a common stochastic process for interest rates in equilibrium models of the term structure.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 27 , Issue 3 , September 1992, pp. 449 - 463
Copyright
Copyright © School of Business Administration, University of Washington 1992

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

Banerjee, A.; Dolada, J. J.; Hendry, D. F.; and Smith, G. W.. “Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence.” Oxford Bulletin of Economics and Statistics, 48 (08 1986), 253–277.Google Scholar
Brennan, M. J., and Schwartz, E. J.. “A Continuous Time Approach to the Pricing of Bonds.” Journal of Banking and Finance, 3 (07 1979), 133–155.CrossRefGoogle Scholar
Campbell, J. Y., and Shiller, R. J.. “Cointegration and Tests of Present Value Models.” Journal of Political Economy, 95 (10 1987), 1062–1088.CrossRefGoogle Scholar
Cox, John C.; Ingersoll, J. E.; and Ross, S. A.. “A Theory of the Term Structure of Interest Rates.” Econometrica, 53 (03 1985), 385–407.CrossRefGoogle Scholar
Dickey, D. A., Estimation and Hypothesis Testing for Nonstationary Time Series. Ph. D. Thesis, Iowa State Univ. (1976).Google Scholar
Dickey, D. A., and Fuller, W. A.. “Distribution of the Estimators for Autoregressive Time Series with a Unit Root.” Journal of the American Statistical Association, 74 (06 1979), 427–431.Google Scholar
Engle, R. F., and Granger, C. W. J.. “Co-Integration and Error Correction: Representation, Estimation, and Testing.” Econometrica, 55 (03 1987), 251–276.CrossRefGoogle Scholar
Engle, R. F., and Yoo, B. S.. “Forecasting and Testing in Co-Integrated Systems.” Journal of Econometrics, 35 (05 1987), 143–159.CrossRefGoogle Scholar
Fuller, W. A.Introduction to Statistical Time Series. New York: John Wiley and Sons (1976).Google Scholar
Granger, C. W. J. “Developments in the Study of Cointegrated Economic Variables.” Oxford Bulletin of Economics and Statistics, 48 (08 1986), 213–228.CrossRefGoogle Scholar
Granger, C. W. J., and Engle, R. F.. “Dynamic Model Specification with Equilibrium Constraints: Cointegration and Error Correction.” Presented at the World Congress of the Econometric Society, Boston, MA (1985).Google Scholar
Granger, C. W. J., and Weiss, A. A.. “Time Series Analysis of Error-Correction Models.” In Studies in Econometrics, Time Series, and Multivariate Statistics. New York: Academic Press (1983), 255–278.Google Scholar
Hall, S. G. “An Application of the Granger & Engle Two-Step Estimation Procedure to United Kingdom Aggregate Wage Data.” Oxford Bulletin of Economics and Statistics, 48 (08 1986), 229–239.CrossRefGoogle Scholar
Harvey, A. C.The Econometric Analysis of Time Series. Oxford: Philip Allan Publishers Ltd. (1981).Google Scholar
Hendry, D. F. “Econometric Modelling with Cointegrated Variables; An Overview.” Oxford Bulletin of Economics and Statistics, 48 (08 1986), 201–212.CrossRefGoogle Scholar
Jenkinson, T. J. “Testing Neo-Classical Theories of Labour Demand: An Application of Cointegration Techniques.” Oxford Bulletin of Economics and Statistics, 48 (08 1986), 241–251.CrossRefGoogle Scholar
Johansen, S., and Juselius, K.. “Maximum Likelihood Estimation and Inference on Cointegration with Applications to the Demand for Money.” Oxford Bulletin of Economics and Statistics, 52 (05 1990), 169–210.CrossRefGoogle Scholar
Langetieg, T. C. “A Multivariate Model of the Term Structure.” Journal of Finance, 35 (03 1980), 71–97.Google Scholar
Mankiw, N. G., and Miron, J. A.. “The Changing Behavior of the Term Structure of Interest Rates.” Quarterly Journal of Economics, 101 (05 1986), 211–228.CrossRefGoogle Scholar
McNown, R. F., and Wallace, M. S.. “National Price Levels as Cointegrated Systems: A Test of Purchasing Power Parity among Four Industrialized Countries.” Mimeo, Univ. of Colorado–Boulder (10 1989).Google Scholar
Nelson, C. R., and Plosser, C.. “Trends and Random Walks in Macroeconomic Time Series: Some Evidence and Implications.” Journal of Monetary Economics, 10 (09 1982), 139–162.CrossRefGoogle Scholar
Phillips, P. C. B., and Durlauf, S. N.. “Multiple Time Series Regression with Integrated Processes.” Review of Economic Studies, 53 (08 1986), 473–495.CrossRefGoogle Scholar
Phillips, P. C. B., and Ouliaris, S.. “Testing for Cointegration.” Discussion Paper No. 809, Yale Univ., Cowles Foundation (1986).Google Scholar
Schwert, G. W. “Effects of Model Specification on Tests for Unit Roots in Macroeconomic Data.” Journal of Monetary Economics, 20 (07 1987), 73–103.Google Scholar
Stock, J. H. “Asymptotic Properties of a Least Squares Estimator of Cointegrating Vectors.” Econometrica, 55 (09 1987), 1035–1056.CrossRefGoogle Scholar
Stock, J. H., and Watson, M. W.. “Testing for Common Trends.” Journal of American Statistical Association, 83 (12 1988), 1097–1107.Google Scholar
Vasicek, O. “An Equilibrium Characterization of the Term Structure.” Journal of Financial Economics, 5 (11 1977), 177–188.CrossRefGoogle Scholar