Nonlinear mean reversion in the term structure of interest rates

Research output: Contribution to journalArticle

22 Citations (Scopus)

Abstract

The expectations hypothesis implies that the yield curve provides information on the future change in the short-term interest rate. However, transaction costs exist in the financial market, which prevent investors from realizing the arbitrage opportunity, when the arbitrage does not fully cover the transaction costs. The purpose of this paper is to assess the effect of transaction costs on the predictability of the term structure by using the threshold vector error correction model, which allows for the nonlinear adjustment to the long-run equilibrium relationship. A significant amount of threshold effect is found, and the adjustment coefficients are regime-dependent. The empirical result supports the nonlinear mean reversion in the term structure of interest rates.

Original languageEnglish
Pages (from-to)2243-2265
Number of pages23
JournalJournal of Economic Dynamics and Control
Volume27
Issue number11-12
DOIs
Publication statusPublished - 2003 Sep

Keywords

  • Expectations hypothesis
  • Threshold cointegration
  • Transaction costs

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

Fingerprint Dive into the research topics of 'Nonlinear mean reversion in the term structure of interest rates'. Together they form a unique fingerprint.

  • Cite this