Mean Reversion of Interest Rates in the Eurocurrency Market

Authors: Wu, Jhy-Lin¹; Chen, Show-Lin²

Source: Oxford Bulletin of Economics and Statistics, Volume 63, Number 4, September 2001 , pp. 459-473(15)

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Abstract:

One stylised fact to emerge from the empirical analysis of interest rates is that the unit-root hypothesis in nominal interest rates cannot be rejected. However, using the panel date unit-root test IM, Pesaran and Shin (1997), we find support for the mean-reverting property of Eurocurrency rates. Thus, neither a vector-error-correction model nor a vector autoregressive model in differences is appropriate for modelling Eurocurrency rates. Instead, conventional modelling strategies with level data are appropriate. Furthermore, the finding of stationary interest rates supports uncovered interest parity, and hence the convergence hypothesis of interest rates. This in turn suggests a limited role for a monetary authority to affect domestic interest rates.

Document Type: Original article

DOI: http://dx.doi.org/10.1111/1468-0084.00229

Affiliations: 1: Department of Economics, National Chung Cheng University, Chia-Yi, 621, Taiwan, 2: Department of Economics, Fu-jen Catholic University, Taipei, 221, Taiwan

Publication date: 2001-09-01