Abstract
This paper investigates the (break) stationarity null hypothesis using data for 25 interest rates with different maturities and risk characteristics in Canada and the US. In contrast to a large part of the literature, this paper reports strong empirical evidence in favour of the null hypothesis of stationarity for the interest rate series.
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Notes
Newbold et al. (2001) being one of the few exceptions.
Refer to Cerrato et al. (2010) for a complete description of these transition functions and tests.
That is policy rue has not changed much since the post WWII experience [see Bernanke (1998) amongst the others]. Furthermore, the Canadian policy of shift towards zero inflation in February 1988 may have also caused structural breaks.
Although the evidence of stationarity is stronger using the sample period 1985–2012, we have also applied the same tests using the sample period 1985–2004 and obtained qualitatively the similar results.
We have selected the Sollis test since it is the test which shows more evidence of stationarity.
Note that, in this case, the transition function is exponential and not logistic.
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Acknowledgments
We would like to thank Karim Abadir for his helpful comments and suggestions.
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Cerrato, M., Kim, H. & MacDonald, R. Nominal interest rates and stationarity. Rev Quant Finan Acc 40, 741–745 (2013). https://doi.org/10.1007/s11156-012-0296-x
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DOI: https://doi.org/10.1007/s11156-012-0296-x