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BEA653 Applied Quantitative The term structure o maturities Figure a relationship between the yields on bonds of different months, 6 months, 1 year. 3 year, 5 year and 10 year The long run parameter estimates of the VECM. B. has the following form yields! 1:010800 0:000000 0:000600 0.000090 a. bonobo 0.0000 00 1000000 0 008000 0.008000 0.060000 0.000000 1.000000 0.00800D 0 0DD000 0.000000 0.000000 1.D00000 0.000900 D.ODDODO 01000800 1 1000800 -0.984151 -1.032363 -0 978260 (0.15466) -1.104874 1 075952 10.01084) (0.00838) [-6 36344] (0 08520) 10 12187) [-52 0387 [-117.00-4] [-12.9675] (-0.64352) Interpret the parameters and explain how these estimates are related to the expectations theory. /4 marks] 8H 190 92 190 98 00 02 06 08 -10 C. Do you agree that a VECM allows to capture the short-run dynamics between the interest USTROY BE USTBBY USTB1Y USTB3M rates? Explain your answer. USTBSY USTREM ( marks) Figure 2. USTBs for different maturities. F. If a VECM with the different interest rates would have a zero rank, what model should we use! De you think the variables presented in Figure 2 are I(!) series? Explain your answer. (2 marks [2 marks) [Total of Question 2 = 20 marks] Which test can be used to verify the expectations theory of the term structure. Explain how you could implement this test for the expectations theory using the 6 interest rates for US Treasury bonds of different maturities. [3 marks] You estimated the Error Correction Model for the 6 interest rates. What do disturbances from this model capture? (3 marks]