A Comparative Analysis of the Expectations Hypothesis of the Term Structure of Interest Rates between the BRICS and G7 Countries

Abstract

This paper examines the predictive ability of the expectations hypothesis of the term structure of interest rates in the BRICS and G7 countries by relating each country’s monthly 3‑month Treasury bill rate to 10‑year government bond rates, from May 2003 to May 2018. The panel ARDL model, applying the mean group (MG), pooled mean group (PMG), and dynamic fixed effects (DFE) estimators, is employed to compare the short‑ and long‑run relationships in both groups of countries. The results show that the expectations hypothesis holds in both BRICS and G7 country groups. In the long run, the short‑term interest rate is able to predict the long-term interest rate in both the BRICS and G7 countries. Interest rates in BRICS indicate rapid adjustment back to the long‑run equilibrium, while the adjustment is sluggish in the G7 block. Based on the findings of the study, the sluggish adjustment to the equilibrium in the G7 gives the impression that the financial crisis had an impact on the term structure of interest rates as the G7 countries were directly affected by the crisis.

Does the Term Structure of Interest Rates Hold True for East-Asian Countries? More Powerful Nonlinear Cointegration Tests

“…Empirical research on the EHTS of interest rates is luxuriant but far from unequivocal so far. In the related studies, the conventional linear model and threshold model are frequently employed to analyze the EHTS of interest rates, such as Shiller (1978a,1991b), Quiros-Romero and Sosvilla-Rivero (1997), Enders and Granger (1998), Camarero and Tamarit (2002), Sarno et al (2007), Suardi (2010), Esteve et al (2013) and Muzindutsi and Mposelwa (2021) et al Recently, a growing agreement has emerged that the EHTS of interest rates demonstrates nonlinear adjustment, for example, Bachmeier and Li (2002), Maki (2006), Haug and Siklos (2007), Sun and Lai-Lei (2012), Guney (2013), Huang and Wang (2014), Grisse (2015), Zhu and Rahman (2015), Cai and Wang (2017), Song et al (2017), Bekiros et al (2018), Liu et al (2020) and Mineo et al (2020) This empirical study enriches this line of research by evaluating whether the EHTS of interest rates holds true in a sample of seven East Asian nations, and whether the adjustment towards their equilibrium takes place in a nonlinear manner. Economic integration appears to be increasing in Asia, and Asia is now playing a significant role in the globe as well.…”