Long-Range Dependence in Daily Interest Rate

We employ a number of parametric and non-parametric techniques toestablish the existence of long-range dependence in daily interbank o errates for four countries. We test for long memory using classical R=Sanalysis, variance-time plots and Lo's (1991) modi ed R=S statistic. Inaddition we estimate the fractional di erencing parameter using Whittle's(1951) maximum likelihood estimator and we shu e the data to destroylong and short memory in turn, and we repeat our non-parametric tests.From our non-parametric tests we And strong evidence of the presence oflong memory in all four series independently of the chosen statistic. We nd evidence that supports the assertion of Willinger et al (1999) thatLo's statistic is biased towards non-rejection of the null hypothesis of nolong-range dependence. The parametric estimation concurs with theseresults. Our results suggest that conventional tests for capital marketintegration and other similar hypotheses involving nominal interest ratesshould be treated with caution