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The Stochastic Volatility of Short-Term Interest Rates: Some International Evidence

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  • Clifford A. Ball

    (Vanderbilt University,)

  • Walter N. Torous

    (Torous is from the University of California, Los Angeles)

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    Abstract

    This paper estimates a stochastic volatility model of short-term riskless interest rate dynamics. Estimated interest rate dynamics are broadly similar across a number of countries and reliable evidence of stochastic volatility is found throughout. In contrast to stock returns, interest rate volatility exhibits faster mean-reverting behavior and innovations in interest rate volatility are negligibly correlated with innovations in interest rates. The less persistent behavior of interest rate volatility reflects the fact that interest rate dynamics are impacted by transient economic shocks such as central bank announcements and other macroeconomic news. Copyright The American Finance Association 1999.

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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 54 (1999)
    Issue (Month): 6 (December)
    Pages: 2339-2359

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    Handle: RePEc:bla:jfinan:v:54:y:1999:i:6:p:2339-2359

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    Cited by:
    1. Antonio Mele, 2002. "Fundamental Properties of Bond Prices in Models of the Short-Term Rate," Working Papers 460, Queen Mary, University of London, School of Economics and Finance.
    2. Daniel R. Smith & Christophe Parignon, 2004. "Modeling Yield-Factor Volatility," Econometric Society 2004 Australasian Meetings 307, Econometric Society.
    3. repec:wyi:journl:002109 is not listed on IDEAS
    4. Ball, Clifford A. & Torous, Walter N., 2000. "Stochastic correlation across international stock markets," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 373-388, November.
    5. Paulo M. M. Rodrigues & Antonio Rubia, 2004. "On the Small Sample Properties of Dickey Fuller and Maximum Likelihood Unit Root Tests on Discrete-Sampled Short-Term Interest Rates," Econometrics 0405004, EconWPA.
    6. Leonardo Bartolini & Alessandro Prati, 2003. "Cross-country differences in monetary policy execution and money market rates' volatility," Staff Reports 175, Federal Reserve Bank of New York.
    7. Viviana Fernández, 2003. "Interest Rate Volatility and Nominalization," Documentos de Trabajo 153, Centro de Economía Aplicada, Universidad de Chile.
    8. Ghulam Sorwar, 2005. "Estimating Single Factor Jump Diffusion Interest Rate Models," Computing in Economics and Finance 2005 56, Society for Computational Economics.
    9. Viviana Fernández, 2002. "How Sensitive is Volatility to Exchange Rate Regimes?," Documentos de Trabajo 135, Centro de Economía Aplicada, Universidad de Chile.
    10. Martin Vojtek, 2004. "Calibration of Interest Rate Models - Transition Market Case," CERGE-EI Working Papers wp237, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
    11. Terence D.Agbeyegbe & Elena Goldman, 2005. "Estimation of threshold time series models using efficient jump MCMC," Economics Working Paper Archive at Hunter College 406, Hunter College Department of Economics, revised 2005.
    12. Bowden, Roger J., 2009. "Lifecycle derivatives and retirement income assurance using long-term debt," Journal of Pension Economics and Finance, Cambridge University Press, vol. 8(03), pages 361-390, July.
    13. Lourdes Gómez-Valle & Julia Mart�nez-Rodr�guez, 2010. "Improving the term structure of interest rates: two-factor models," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(3), pages 275-287.
    14. Ramaprasad Bhar, 2010. "Stochastic Filtering With Applications In Finance:," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 7736.
    15. Driessen, J.J.A.G. & Klaassen, P. & Melenberg, B., 2000. "The Performance of Multi-Factor Term Structure Models for Pricing and Hedging Caps and Swaptions," Discussion Paper 2000-93, Tilburg University, Center for Economic Research.
    16. Anders B. Trolle & Eduardo S. Schwartz, 2009. "A General Stochastic Volatility Model for the Pricing of Interest Rate Derivatives," Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 2007-2057, May.
    17. Ball, Clifford A. & Torous, Walter N., 2000. "Stochastic Correlation Across International Stock Markets," University of California at Los Angeles, Anderson Graduate School of Management qt6vn9q79w, Anderson Graduate School of Management, UCLA.

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