Testing for long-range dependence in the Brazilian term structure of interest rates

This paper presents empirical evidence of fractional dynamics in interest rates for different maturities for Brazil. A variation of a newly developed test for long-range dependence, the V/S statistic, with a post-blackening bootstrap is employed. Results suggest that Brazilian interest rates possess strong long-range dependence in volatility, even when considering the structural break in 1999. These findings imply that the development of policy models that give rise to long-range dependence in interest rates’ volatility could be very useful. The long–short-term interest rates spread has strong long-range dependence, which suggests that traditional tests of expectation hypothesis of the term structure of interest rates may be misspecified.