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Discussion Paper

No. 2008-13 | April 07, 2008
Level, Slope, Curvature: Characterising the Yield Curve in a Cointegrated VAR Model

Abstract

Empirical evidence on the expectations hypothesis of the term structure is inconclusive and its validity widely debated. Using a cointegrated VAR model of US treasury yields, this paper extends a common approach to test the theory. If, as we find, spreads between two yields are non-stationary, the expectations hypothesis fails. However, we present evidence that differences between two spreads are stationary. This suggests that the curvature of the yield curve may be a more meaningful indicator of expected future interest rates than the slope. Furthermore, we characterise level and slope by deriving the common trends inherent in the cointegrated VAR, and establish feedback patterns between them and the macroeconomy.

Paper submitted to the special issue "Using Econometrics for Assessing Economic Models" edited by Katarina Juselius.

JEL Classification

C32 E43 E44

Cite As

Julia V. Giese (2008). Level, Slope, Curvature: Characterising the Yield Curve in a Cointegrated VAR Model. Economics Discussion Papers, No 2008-13, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2008-13

Assessment



Comments and Questions


Anonymous - Additional restrictions
April 08, 2008 - 13:29

The idea of considering the econometric implications stemming from the curvature of the yield curve is valuable and appealing. In this respect, I think the paper represents a nice piece of work.

However, in line with many existing contributions, the paper investigates only part of the implications of the ...[more]

... expectations hypothesis of the term structure of the interest rates (EHTS). Actually, Eq. (5) entails a set of testable restrictions also on the short-run dynamic structure of the CVAR, and the omission of those restrictions leads to a partial empirical assessment of the theory.

It seems to me that the approach proposed by the author can potentially be extended to cover the full set of constraints implied by the EHTS.


Anonymous - Referee Report
July 21, 2008 - 16:55

See attached file


Julia Giese - Reply to Referee 1
August 30, 2008 - 14:50

Please see pdf file.


Anonymous - Referee Report
August 04, 2008 - 16:53

See attached file


Julia Giese - Reply to Referee 2
August 30, 2008 - 14:52

Please see pdf file.