Cointegration and the US term structure

Abstract

Using the maximum likelihood analysis of cointegration developed by Johansen (1988, 1991), we test the cointegration implications of the expectations hypothesis of the term structure on a sample of US pure discount yields. By using this approach, we are able to analyze systems of more than two interest rates simultaneously, as opposed to most previous studies, which examine interest rates only in pairs. One of the main results is that, for the period 1952–1987, the cointegration implications generally seem to hold.