Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/62847
Authors: 
Hatgioannides, John
Karanasos, Menelaos
Karanassou, Marika
Year of Publication: 
2004
Series/Report no.: 
Working Paper, Department of Economics, Queen Mary, University of London 519
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

Files in This Item:
File
Size
347.41 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.