International Finance Discussion Papers (IFDP)
July 1985
Long Memory Models of Interest Rates, The Term Structure, and Variance Bounds Tests
Gary S. Shea
Abstract:
Variance bounds tests of the rational expectations hypothesis of the interest rate term structure are sensitive to the stochastic characterization of short-term interest rates used. When a long memory or fractional difference nonstationary time series model is used in preference to a mean stationary model, the rational expectations hypothesis is not rejected. Long memory models of interest rates are estimated and tested against alternatives. Their forecasting properties are also examined. Hypothesis tests are based upon bootstrapping (Monte Carlo) methodologies.
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