Premium
THE TERM STRUCTURE OF INTEREST RATES AS A COINTEGRATED SYSTEM: EMPIRICAL EVIDENCE FROM THE EUROCURRENCY MARKET
Author(s) -
Mougoué Mbodja
Publication year - 1992
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1992.tb00806.x
Subject(s) - cointegration , unit root , economics , term (time) , interest rate , econometrics , yield curve , asset (computer security) , monetary economics , computer science , physics , quantum mechanics , computer security
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.