Fractional cointegration in US term spreads

This article examines the stochastic properties of US term spreads with parametric and semi-parametric fractional integration techniques. Since the observed data (rather than the estimated residuals from a cointegrating regression) are used for the analysis, standard methods can be applied. The results indicate that US Treasury maturity rates are <italic>I</italic>(1) in most cases, although the order of integration decreases with maturity. Furthermore, mean reversion occurs for the 5-, 7- and 10-year rates as well as for several term spreads, suggesting that the expectation hypothesis of the term structure is supported empirically in these cases.