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

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Author Info
Clifford A. Ball (Vanderbilt University,)
Walter N. Torous (Torous is from the University of California, Los Angeles)
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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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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  1. Viviana Fernández, 2003. "Interest Rate Volatility and Nominalization," Documentos de Trabajo 153, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
  2. Viviana Fernández, 2002. "How Sensitive is Volatility to Exchange Rate Regimes?," Documentos de Trabajo 135, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
  3. 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. [Downloadable!]
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  4. Driessen, J. & Klaassen, P. & Melenberg, B., 2000. "The performance of multi-factor term structure models for pricing and hedging caps and swaptions," Discussion Paper 93, Tilburg University, Center for Economic Research. [Downloadable!]
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  5. Ghulam Sorwar, 2005. "Estimating Single Factor Jump Diffusion Interest Rate Models," Computing in Economics and Finance 2005 56, Society for Computational Economics. [Downloadable!]
  6. Clifford Ball & Walter Torous, 2000. "Stochastic Correlation Across International Stock Markets," University of California at Los Angeles, Anderson Graduate School of Management 1063, Anderson Graduate School of Management, UCLA. [Downloadable!]
  7. 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. [Downloadable!]
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  8. Caio Ibsen R. Almeida & José Valentim M. Vicente, 2007. "Identifying Volatility Risk Premium from Fixed Income Asian Options," Working Papers Series 136, Central Bank of Brazil, Research Department. [Downloadable!]
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  9. A. Mele, 2000. "Fundamental Properties of Bond Prices in Models of the Short-Term Rate," THEMA Working Papers 2000-39, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise. [Downloadable!]
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  10. Martin Vojtek, 2004. "Calibration of Interest Rate Models - Transition Market Case," Finance 0410015, EconWPA. [Downloadable!]
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  11. Daniel R. Smith & Christophe Parignon, 2004. "Modeling Yield-Factor Volatility," Econometric Society 2004 Australasian Meetings 307, Econometric Society. [Downloadable!]
  12. Terence D.Agbeyegbe & Elena Goldman, 2005. "Estimation of threshold time series models using efficient jump MCMC," Hunter College Department of Economics Working Papers 406, Hunter College: Department of Economics, revised 2005. [Downloadable!]
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