Question 2 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 8 6 4 2 0 86 88 90 92 94 96 98 00 02 04 06 08 10 12 USTB 10Y USTB3Y US TB1Y USTB5Y USTB USTBOM 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. c. (5 marks] You estimated the Error Correction Model for the 6 interest rates. What do disturbances from this model capture? [3 marks] Question 2 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 8 6 4 2 0 86 88 90 92 94 96 98 00 02 04 06 08 10 12 USTB 10Y USTB3Y US TB1Y USTB5Y USTB USTBOM 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. c. (5 marks] You estimated the Error Correction Model for the 6 interest rates. What do disturbances from this model capture? [3 marks]