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Mean Reversion of Interest Rates in the Eurocurrency Market
Author(s) -
Wu JhyLin,
Chen ShowLin
Publication year - 2001
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/1468-0084.00229
Subject(s) - interest rate , unit root , econometrics , mean reversion , autoregressive model , economics , interest rate parity , nominal interest rate , error correction model , real interest rate , cointegration , monetary economics
One stylised fact to emerge from the empirical analysis of interest rates is that the unit‐root hypothesis in nominal interest rates cannot be rejected. However, using the panel date unit‐root test IM, Pesaran and Shin (1997), we find support for the mean‐reverting property of Eurocurrency rates. Thus, neither a vector‐error‐correction model nor a vector autoregressive model in differences is appropriate for modelling Eurocurrency rates. Instead, conventional modelling strategies with level data are appropriate. Furthermore, the finding of stationary interest rates supports uncovered interest parity, and hence the convergence hypothesis of interest rates. This in turn suggests a limited role for a monetary authority to affect domestic interest rates.