An alternative mean reversion test for interest rates

Abstract

A number of empirical studies assert that interest rates are governed by unit root processes rejecting anyform of reversion to a long term mean by resorting to certain tests, among which the Augmented DickeyFuller (ADF) is the most widely used one. In this study, we propose an alternative testing methodologythat can be applied along with ADF test, in the sense that there are times where it can capture stationarity when the other fails to do so. Moreover, our test has more power than ADF test. As an applicationto real-data, we consider 10-year US and Turkish T-bond rates.© 2017 Central Bank of The Republic of Turkey. Production and hosting by Elsevier B.V. This is an openaccess article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/)