Cointegration and Tests of Present Value Models

Abstract

Application of some advances in econometrics (in the theory of cointegrated vector autoregressive models) enables us to deal effectively with two problems in rational-expectations, present-valu e models: nonstationarity of time series and incomplete data on infor mation of market participants. With U.S. data, the authors find some relatively encouraging new results for the rational-expectations theo ry of the term structure and some puzzling results for the present-va lue model of stock prices. Copyright 1987 by University of Chicago Press.