Regime switching in the relationship between equity returns and short-term interest rates in the UK
AbstractThis paper examines the relationship between UK equity returns and short-term interest rates using a two regime Markov-Switching EGARCH model. The results suggest one high-return, low variance regime within which the conditional variance of equity returns responds persistently but symmetrically to equity return innovations. In the other, low-mean, high variance, regime equity volatility responds asymmetrically and without persistence to shocks to equity returns. There is evidence of a regime dependent relationship between shorter maturity interest rate differentials and equity return volatility. Furthermore, there is evidence that events in the money markets influence the probability of transition across regimes.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 33 (2009)
Issue (Month): 2 (February)
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Web page: http://www.elsevier.com/locate/jbf
Regime switching Time-varying transition probabilities Interest rate spreads;
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