Assignment Task :
Question 1 The expectation theory of the term structure of interest rates implies that if two interest rates of different maturities are I(1), then they will be cointegrated with a cointegrating coefficient of one; that is, the spread between the two rates will be stationary. The series SPREAD is calculated by subtracting the short-term rate from the long-term rate. The aim of this exercise is to test the above theory. The data for this exercise are given for the United States and are contained in the file Data Coursework 19-20.xlsx, where G10 is the 10-Year Treasury Constant Maturity Rate (Quarterly Average of Monthly Values), and TB3MS is the 3-Month Treasury Bill (Quarterly Average of Monthly Values). The period in consideration is from 1957 to 2013 (source: Bloomberg).
Answer the following question:
a) Generate an appropriate Eview workfile. Create the new series SPREAD as explained above. Graph and show the descriptive statistics of the time series and comment briefly;
b) Test whether the series G10 is a random walk or a martingale and briefly comment;
c) Investigate the order of integration of the series G10 and TB3MS;
d) Examine whether the two series G10 and TB3MS are cointegrated. Carry out an Engle-Granger cointegration test;
e) Estimate and explain the results of the following two vector error correction models of the two interest rates:
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