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Relationship Between Expected Treasury Bill and Eurodollar Interest Rates: A Fractional Cointegration Analysis

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Abstract

In this paper, we extend Booth and Tse's (BT)1995 analysis of fractional cointegration between theexpected Eurodollar and Treasury bill interest ratesimplied by their respective futures contracts. Thedefinition of fractional cointegration suggested byCheung and Lai (1993) and used by BT is refined sothat it requires the cointegrating relationship to bestationary as well as mean-reverting. In addition tothe Geweke and Porter-Hudak method used by BT, a moreefficient Maximum Likelihood (ML) method is used toestimate the cointegrating relationship. The LM (Engle(1982)) test indicates the possible existence of aheteroscedastic cointegrating relationship. Therefore,we use heteroscedastic models (GARCH and ExponentialGARCH) to represent the cointegrating regressioninstead of the simple homoscedastic model used by BT.The empirical evidence cannot reject the nullhypothesis of a stationary fractional cointegrationrelationship between the Eurodollar and Treasury billinterest rates.

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Authors and Affiliations

  1. Faculty of Administration, University of Regina, Regina, Saskatchewan, Canada, S4S 6A2

    Keshab Shrestha

  2. Department of Accounting and Finance, Faculty of Business, Brock University, St. Catharines, Ontario, Canada, L2S 3A1

    Robert L. Welch

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  1. Keshab Shrestha
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  2. Robert L. Welch
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Shrestha, K., Welch, R.L. Relationship Between Expected Treasury Bill and Eurodollar Interest Rates: A Fractional Cointegration Analysis. Review of Quantitative Finance and Accounting 16, 65–80 (2001). https://doi.org/10.1023/A:1008340408261

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