Statistical evidence on the mean reversion of interest rates

Jan Willem van den End

Abstract

ABSTRACT

Based on 200 years of annual data from the Netherlands, Germany, the United States and Japan we analyze the mean reversion of long-term interest rates using unit root tests over rolling windows and taking into account structural breaks and regime changes. While short-term rates and the yield curve tend to revert to their long-term average values, long-term rates can persistently deviate from their long-term average. We find only weak statistical evidence for mean reversion of long-term rates. Outcomes of smooth transition autoregressive models for longterm interest rates indicate that the speed of mean reversion is regime dependent, being stronger when rates are far from their equilibrium value.