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Evidence of long memory in short-term interest rates

✍ Scribed by Nigel Meade; Margaret R. Maier

Publisher
John Wiley and Sons
Year
2003
Tongue
English
Weight
129 KB
Volume
22
Category
Article
ISSN
0277-6693

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✦ Synopsis

Abstract

The issues of non‐stationarity and long memory of real interest rates are examined here. Autoregressive models allowing short‐term mean reversion are compared with fractional integration models in terms of their ability to explain the behaviour of the data and to forecast out‐of‐sample. The data used are weekly observations of 3‐month Eurodeposit rates for 10 countries, adjusted for inflation, for 14 years. Following Brenner, Harjes and Kroner, the volatility of these rates is shown to both exhibit GARCH effects and depend on the level of interest rates. Although relatively little support is found for the hypothesis of mean reversion, evidence of long memory in interest rate changes is found for seven countries. The out‐of‐sample forecasting performance for a year ahead of the fractional integrated models was significantly better than a no change. Copyright © 2003 John Wiley & Sons, Ltd.

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