Fractional Cointegration Analysis of Long Term International Interest Rates

Boston College Economics WP 315

Posted: 13 Jun 1998

See all articles by John T. Barkoulas

John T. Barkoulas

University of Tennessee, Knoxville - College of Business Administration - Department of Economics

Christopher F. Baum

Boston College - Department of Economics

Gurkan S. Oguz

Tufts University

Date Written: May 1996

Abstract

DeGennaro, Kunkel, and Lee (1994) studied the long run dynamics of a system of long term interest rates of five industrialized countries by means of sophisticated cointegration methods. They found little evidence in support of the cointegration hypothesis, thus concluding that a separate set of fundamentals drives the dynamics of each of the individual long term interest rate series. In this study, we extend their analysis by exploring the possibility of very slow mean reverting dynamics (fractional cointegration) in the system of the five long term interest rates. We use the GPH test as our testing methodology for fractional integration and cointegration. Through rigorous investigation of the full system of the five long term interest rate series and its various subsystems, we provide evidence that the error correction term follows a fractionally integrated process with long memory, that is, it is mean reverting, though not covariance stationary. Despite significant persistence in the short run, a shock to the system of long term interest rates eventually dissipates so that an equilibrium relationship prevails in the long run.

JEL Classification: C32, E43

Suggested Citation

Barkoulas, John T. and Baum, Christopher (Kit) F. and Oguz, Gurkan S., Fractional Cointegration Analysis of Long Term International Interest Rates (May 1996). Boston College Economics WP 315, Available at SSRN: https://ssrn.com/abstract=7531

John T. Barkoulas

University of Tennessee, Knoxville - College of Business Administration - Department of Economics

508 Stokely Management Center
Knoxville, TN 37996-0550
United States

Christopher (Kit) F. Baum (Contact Author)

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-3673 (Phone)
617-552-2308 (Fax)

Gurkan S. Oguz

Tufts University ( email )

Medford, MA 02155
United States

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