TERM STRUCTURE OF EUROCURRENCY MARKET INT EREST-RATES - TEST OF COINTEGRATION AND CAUSALITY

This study examines the term structure of interest rates (TSIR) of fou r Eurocurrencies (U.S. dollar, deutsche mark, Dutch guilder, and Frenc h franc) using the analytical framework of Campbell and Shiller (1987) . According to this model, the rates in a TSIR must be integrated if t he pure expectations hypothesis is true and investors' expectations ar e rational. Further, a causal relationship must exist between short- a nd long-term interest rates. Our results show that interest rates seri es of different maturity are first-order integrated and cointegrated. Taking explicitly into consideration the presence of heteroscedasticit y and serial correlation, we identify a causal relationship between th e rates. Globally, the results support the proposition that the expect ations hypothesis explains the TSIR in the Eurocurrency market.