Reconciling interest rates evidence with theory: rejecting unit roots when the HD(1) is a competing alternative

The paper introduces the HD(1), a Markovian process of order one with reversion rates that are faster the farther the process is from equilibrium. The aHD(1) approximation is introduced to allow for an estimation-calibration procedure based on available ARMA routines. Critical values of unit root tests with aHD(1) alternative are tabulated for the signed likelihood-ratio statistic. Revisiting the non-stationarity of interest rates stylized fact, the aHD(1) is found to be preferred to ARMA, SETAR and RCA and the resulting tests to reject the unit root hypothesis for all rates and yields considered.