| This study uses weekly Canadian short and long-term interest rate data from 1980 to 1998 to test the pure expectations hypothesis of the term structure of interest rates. The Augmented Dickey-Fuller (1981) unit root test, the Engle and Granger (1987) cointegration test and the Granger (1969) causality test are applied. An autoregressive model is estimated in each case, revealing a significant relationship between the short rate and long rate by way of the interest rate spread. Evidence is found that short-term interest rates and long-term interest rates are cointegrated and that there exists bi-directional causality between them. This supports the pure expectations hypothesis of the term structure of interest rates. |
