The Spanish term structure of interest rates revisited: Cointegration with multiple structural breaks, 1974–2010

In this paper we consider the possibility that a linear cointegrated regression model with multiple structural changes would provide a better empirical description of the Spanish term structure of interest rates. Our methodology is based on instability tests recently proposed in Kejriwal and Perron (2008, 2010) as well as the cointegration tests developed in Arai and Kurozumi (2007) and Kejriwal (2008). The results obtained are consistent with the existence of linear cointegration between the long and the short run Spanish interest rates. However, our empirical results also show that the cointegrating relationship has changed over time. In particular, the Kejriwal–Perron tests for testing multiple structural breaks in cointegrated regression models suggest a model of two regimes. ► We extend the empirical analysis of the EH of the term structure of interest rates. ► We use recent cointegrated regression models with multiple structural changes. ► We use a long span of the data. ► We use the Spanish term structure of interest rates as a case study.