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14 maart 2011 Onderzoek Toezichtlabel Working Papers

Statistical evidence on the mean reversion of interest rates

Based on two hundred years of annual data of the Netherlands , Germany , US and Japan we analyse the mean reversion of long-term interest rates, by unit root tests over rolling windows and taking into account structural breaks and regime changes. While short-term rates and the yield curve tend to revert to their long-term average value, long-term rates can persistently deviate from it. At the outside, we only find weak statistical evidence for mean reversion of long-term rates. Outcomes of smooth transition autoregressive ( STAR ) models for long-term interest rates, indicate that the speed of mean reversion is regime dependent, being stronger when rates are far from their equilibrium value.

Key words: interest rates, statistical methods, time-series models.

JEL Codes: C22, C49, G12.

Working paper no. 284

284 - Statistical evidence on the mean reversion of interest rates

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  • Jan Willem van den End