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An Empirical Study on the Lapse Rate: The Cointegration Approach
Author(s) -
Kuo Weiyu,
Tsai Chenghsien,
Chen WeiKuang
Publication year - 2003
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/1539-6975.t01-1-00061
Subject(s) - cointegration , economics , interest rate , econometrics , fisher hypothesis , unemployment rate , exchange rate , real interest rate , short rate , lapse rate , unemployment , monetary economics , keynesian economics , financial economics , macroeconomics , yield curve , atmospheric sciences , geology
We use the cointegration technique to reexamine the contending lapse rate hypotheses: the emergency fund hypothesis and the interest rate hypothesis. We find that the unemployment rate affects the lapse rate in both the long and short run, whereas the interest rate causes variations in the lapse rate mainly in the long run. This evidence seems to be in favor of the emergency fund hypothesis. However, according to the impulse response analysis of the estimated error‐correction model, the interest rate overwhelms the unemployment rate on the overall impact on the dynamics of lapse rate. In other words, the interest rate hypothesis is favored against the emergency fund hypothesis in the sense that the interest rate is more economically significant than the unemployment rate in explaining the lapse rate dynamics.