Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/62847 
Year of Publication: 
2004
Series/Report no.: 
Working Paper No. 519
Publisher: 
Queen Mary University of London, Department of Economics, London
Abstract: 
Using parametric return autocorrelation tests and non parametric variance ratio statistics show that the UK and US short-term interest rates are unit root processes with significant mean reverting components. Congruent with this empirical evidence, we develop a new continuous time term structure model which assumes that the dynamics of the instantaneous interest rate are given by the joint effect of a (stationary) mean reverting component and a (nonstationary) martingale component. We provide a closed-form solution for the equilibrium yield curve when the temporary component is modelled as an Ornstein-Uhlenbeck process and the permanent component is modelled as an Arithmetic Brownian motion process.
Subjects: 
Term structure, Mean reversion, Random walk, Brownian motion, Variance ratio, Linear regression
JEL: 
C20
E43
G12
Document Type: 
Working Paper

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