Testing the long-run implications of the expectation hypothesis using cointegration techniques with structural change
Pereira, Pedro L. Valls
This paper investigates whether or not multivariate cointegrated process with structural change can describe the Brazilian term structure of interest rate data from 1995 to 2006. In this work the break point and the number of cointegrated vector are assumed to be known. The estimated model has four regimes. Only three of them are statistically different.The first starts at the beginning of the sample and goes until September of 1997. The second starts at October of 1997 until December of 1998. The third starts at January of 1999 and goes until the end of the sample. It is used monthly data. Models that allows for some similarities across the regimes are also estimated and tested. The models are estimated using the Generalized Reduced-Rank Regressions developed by Hansen (2003).All imposed restrictions can be tested using likelihood ratio test with standard asymptotic 1 qui-squared distribution. The results of the paper show evidence in favor of the long run implications of the expectation hypothesis for Brazil.
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