Example 214

ARE 3-MONTH AND 6-MONTH TREASURY BILL RATES COINTEGRATED?

Figure 21.13 plots (constant maturity) 3-month and 6-month U.S. Treasury bill (T bill) rates from January 1982 to June 2001, for a total of 234 observations. Does the graph show that the two rates are cointegrated; that is, is there an equilibrium relationship between the two? From financial theory, we would expect that to be the case, otherwise arbitrageurs will exploit any discrepancy between the short and the long rates. First of all, let us see if the two time series are stationary.

EXAMPLE 20.1 (Continued)

Year

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