Term Structure Persistence

Abstract

Stationary I(0) models employed in yield curve analysis typically imply an unrealistically low degree of volatility in long-run short-rate expectations due to fast mean reversion. In this paper we propose a novel multivariate affine term structure model with a two-fold source of persistence in the yield curve: Long-memory and short-memory. Our model, based on an I(d) specification, nests the I(0) and I(1) models as special cases and the I(0) model is decisively rejected by the data. Our model estimates imply both mean reversion in yields and quite volatile long-distance short-rate expectations, due to the higher persistence imparted by the long-memory component. Our implied term premium estimates differ from those of the I(0) model during some relevant periods by more than 4 percentage points and exhibit a realistic countercyclical pattern. Mirko Abbritti AbstractStationary I(0) models employed in yield curve analysis typically imply an unrealistically low degree of volatility in long-run short-rate expectations due to fast mean reversion. In this paper we propose a novel multivariate affine term structure model with a two-fold source of persistence in the yield curve: Long-memory and short-memory. Our model, based on an I(d) specification, nests the I(0) and I(1) models as special cases and the I(0) model is decisively rejected by the data. Our model estimates imply both mean reversion in yields and quite volatile long-distance short-rate expectations, due to the higher persistence imparted by the long-memory component. Our implied term premium estimates differ from those of the I(0) model during some relevant periods by more than 4 percentage points and exhibit a realistic countercyclical pattern.JEL Classification: C3, E4, G1

Testing the Fisher Hypothesis in the G-7 Countries Using I(d) Techniques

“…evidence that rational agents require nominal rates to adjust in response to movements in "tax-adjusted" expected inflation. Crowder and Hoffman (1996) showed that the choice of estimator is crucial, an issue further investigated by Caporale and Pittis (2004) Barkoulas and Baum (1997), Meade and Maier (2003), Gil-Alana (2004a,b), Couchman, Gounder and Su (2006), Gil-Alana and Moreno, 2012, Haug, 2014, Apergis et al, 2015, Abbritti et al (2016, etc. As for inflation rates, evidence of long memory has been reported in many papers including Hassler (1993), Delgado and Robinson (1994), Hassler and Wolters (1995), Baillie et al (1996), Baum et al (1999), Hyung et al (2006, Kumar andOkimoto (2007), etc.…”

Market efficiency of Baltic stock markets: A fractional integration approach

“…where yt is the time series we observe and zt is a (kx1) vector of deterministic terms that might include a constant and a time trend. This test has a standard null limit distribution and its functional form can be found in any of the numerous empirical applications of the tests, (see, e.g., Gil-Alana and Robinson, 1997;Moreno, 2012 andAbbritti et al, 2016 among others). Additionally, we use a semiparametric approach (Robinson, 1995) that is also based on the Whittle function and that uses only a band of frequencies degenerating to zero.…”

Long memory and data frequency in financial markets

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