Interest Parity, Cointegration and the Term Structure: Testing in an Integrated Framework

19 Pages Posted: 3 May 2001

See all articles by Dimitris A. Georgoutsos

Dimitris A. Georgoutsos

Athens University of Economics and Business - Department of Accounting and Finance

Georgios P. Kouretas

Athens University of Economics and Business; IPAG Business School

Date Written: January 2001

Abstract

In this paper we develop a methodology for testing the validity of the expectations theory of the term structure and the uncovered interest parity within the framework provided by cointegration theory. For this purpose, we apply the multivariate cointegration technique suggested by Johansen (1988, 1991) using data on interest rates from the eurodollar and euromark markets with maturity ranging from 7 days to 1 year. First, we were able to find nine statistically significant cointegrating vectors among the system of ten interest rates. Second, given that more than one long-run relationships were found we imposed independent linear and homogeneous restrictions on the system and the joint structure of the expectations theory and the UIP could not be rejected implying that our proposed framework is a valid framework to study the interdependence of monetary policy in an integrated scheme. Finally, with the application of tests for parameter stability in cointegrated models we show that our cointegration results are sample independent and that the estimated coefficients do not suffer from instabilities in recursive estimations.

Keywords: Cointegration, expectations theory, uncovered interest parity, eurocurrency markets, stability

JEL Classification: F31, F33

Suggested Citation

Georgoutsos, Dimitris and Kouretas, Georgios P., Interest Parity, Cointegration and the Term Structure: Testing in an Integrated Framework (January 2001). EFMA 2001 Lugano Meetings, Available at SSRN: https://ssrn.com/abstract=268909 or http://dx.doi.org/10.2139/ssrn.268909

Dimitris Georgoutsos

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Georgios P. Kouretas (Contact Author)

Athens University of Economics and Business ( email )

Department of Business Administration
Athens, GR-10434
Greece

HOME PAGE: http://www.aueb.gr/Users/kouretas/index_en.html

IPAG Business School ( email )

184 BD Saint Germain
Paris, 75006
France

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