Question 2 d. The long-run parameter estimates of the VECM, B, has the following form: The term structure of interest rates is the relationship between the yields on bonds of different maturities. Figure 2 below shows the 3 months, 6 months, 1 year, 3 year, 5 year and 10 year 1.000000 0.000000 0.000000 0.000000 0.000000 yields. 0.000000 1.000000 0.000000 0.000000 0.000000 0.000000 0.000000 1.000000 0.000000 0.000000 B= 0.000000 0.000000 0.000000 1.000000 0.000000 0.000000 0.000000 0.000000 0.000000 1.000000 0.984151 -1.032363 -0.978260 1.104874 1.075952 (0.15466) (0.01984) (0.00836) (0.08520) (0.12167) [-6.36344] [-52.0387] [-117.004] [-12.9675] (-8.84352] Interpret the parameters and explain how these estimates are related to the expectations theory. N [4 marks] c. Do you agree that a VECM allows to capture the short-run dynamics between the interest rates? Explain your answer. 86 88 90 92 94 96 98 00 02 04 06 08 10 12 [4 marks] US TB 10Y USTB1Y f. If a VECM with the different interest rates would have a zero rank, what model should USTB3M USTB3Y USTB5Y USTB6M we use? [2 marks] Figure 2. USTBs for different maturities. [Total of Question 2 = 20 marks] a. Do you think the variables presented in Figure 2 are I(1) series? Explain your answer. [2 marks] b. 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. [5 marks] c. You estimated the Error Correction Model for the 6 interest rates. What do disturbances from this model capture? (3 marks]The term structure of interest rates is the relationship between the yields on bonds of different maturities. Figure 2 below shows the 3 months, 6 months, 1 year, 3 year, 5 year and 10 year yields. 10 6 - 2 86 88 90 92 94 96 98 00 02 04 06 08 10 12 - USTB 10Y USTB1Y USTB3Y USTB3M USTB5Y USTB6M Figure 2. USTBs for different maturities. a. Do you think the variables presented in Figure 2 are I(1) series? Explain your answer. [2 marks] b. 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. [5 marks] C. You estimated the Error Correction Model for the 6 interest rates. What do disturbances from this model capture? d. The long-run parameter estimates of the VECM, B, has the following form: 1.000000 0.000000 0.000000 0.000000 0.000000 0.000000 1.000000 0.000000 0.000000 0.000000 0.000000 0.000000 1.000000 0.000000 0.000000 B = 0.000000 0.000000 0.000000 1.000000 0.000000 0.000000 0.000000 0.000000 0.000000 1.000000 -0.984151 -1.032363 -0.978260 -1.104874 -1.075952 (0.15466) (0.01984) (0.00836) (0.08520) (0.12167) [-6.36344] [-52.0387] [-117.004] [-12.9675] [-8.84352] Interpret the parameters and explain how these estimates are related to the expectations theory. [4 marks] e. Do you agree that a VECM allows to capture the short-run dynamics between the interest rates? Explain your answer. [4 marks] f. If a VECM with the different interest rates would have a zero rank, what model should we use
