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Title:Mean-variance cointegration and the expectations hypothesis PDF Logo
Authors:Strohsal, Till
Weber, Enzo
Issue Date:2011
Series/Report no.:SFB 649 discussion paper 2011-007
Abstract:The present paper sheds further light on a well-known (alleged) violation of the expectations hypothesis of the term structure (EHT) - the frequent finding of unit roots in interest rate spreads. We show that the EHT implies (i) that the nonstationarity stems from the holding premium, which is hence (ii) cointegrated with the spread. In a stochastic discount factor framework we model the premium as being driven by the integrated variance of excess returns. Introducing the concept of mean-variance cointegration we actually find cointegration relations between spreads and premia in US data.
Subjects:expectations hypothesis
holding premium
persistence
cointegration
GARCH
JEL:E43
C32
Document Type:Working Paper
Appears in Collections:SFB 649 Discussion Papers, HU Berlin

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