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Multivariate term structure models with level and heteroskedasticity effects

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  • Christiansen, Charlotte

Abstract

The paper introduces and estimates a multivariate level-GARCH model for the long rate and the term structure spread where the conditional volatility is proportional to the y’th power of the variable itself (level effects) and the conditional covariance matrix evolves according to a multivariate GARCH process (heteroskedasticity effects). The conditional long rate variance exhibits heteroskedasticity effects and level effects in accordance with the square-root model. The conditional spread variance exhibits heteroskedasticity effects but no level effects. The level-GARCH model is preferred above the GARCH model and the level model. GARCH effects are more important than level effects.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 29 (2005)
Issue (Month): 5 (May)
Pages: 1037-1057

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Handle: RePEc:eee:jbfina:v:29:y:2005:i:5:p:1037-1057

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References

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Citations

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Cited by:
  1. Christiansen, Charlotte, 2008. "Level-ARCH short rate models with regime switching: Bivariate modeling of US and European short rates," International Review of Financial Analysis, Elsevier, vol. 17(5), pages 925-948, December.
  2. Shu Wu, 2007. "Interest Rate Risk and the Forward Premium Anomaly in Foreign Exchange Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 423-442, 03.
  3. Sandy Suardi & O.T.Henry & N. Olekalns, . "Equity Return and Short-Term Interest Rate Volatility: Level Effects and Asymmetric Dynamics," MRG Discussion Paper Series 0206, School of Economics, University of Queensland, Australia.
  4. Daniel R. Smith & Christophe Parignon, 2004. "Modeling Yield-Factor Volatility," Econometric Society 2004 Australasian Meetings 307, Econometric Society.
  5. Goeij, P. C. de & Marquering, W., 2009. "Stock and bond market interactions with level and asymmetry dynamics: An out-of-sample application," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3557318, Tilburg University.
  6. Bali, Turan G. & Wu, Liuren, 2006. "A comprehensive analysis of the short-term interest-rate dynamics," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1269-1290, April.
  7. de Goeij, Peter & Marquering, Wessel, 2009. "Stock and bond market interactions with level and asymmetry dynamics: An out-of-sample application," Journal of Empirical Finance, Elsevier, vol. 16(2), pages 318-329, March.
  8. Brown, Craig R. & Cyree, Ken B. & Griffiths, Mark D. & Winters, Drew B., 2008. "Further analysis of the expectations hypothesis using very short-term rates," Journal of Banking & Finance, Elsevier, vol. 32(4), pages 600-613, April.
  9. Ramaprasad Bhar, 2010. "Stochastic Filtering With Applications In Finance:," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 7736.

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