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Modeling the time-varying volatility of the paper-bill spread

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  • Malik, Farooq
  • Ewing, Bradley T.
  • Kruse, Jamie B.
  • Lynch, Gerald J.

Abstract

The spread between the rates on commercial paper and Treasury bills has received considerable attention in the literature for its role as an indicator of real economic activity. In this paper we empirically examine what happens when the volatility of the spread changes over time. We estimate a nonlinear model that enables us to discern the asymmetric impact of negative and positive shocks to the spread. We find that a positive shock has a larger impact on the volatility of the spread than does a negative shock.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economics and Business.

Volume (Year): 61 (2009)
Issue (Month): 5 (September)
Pages: 404-414

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Handle: RePEc:eee:jebusi:v:61:y::i:5:p:404-414

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Web page: http://www.elsevier.com/locate/jeconbus

Related research

Keywords: Paper-bill spread Volatility EGARCH;

References

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  1. Robert A. Jones & Joseph M. Ostroy, 1979. "Flexibilty and Uncertainty," UCLA Economics Working Papers 163, UCLA Department of Economics.
  2. Engle, Robert F & Ng, Victor K, 1993. " Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-78, December.
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  4. Arturo Estrella & Frederic S. Mishkin, 1996. "Is There a Role for Monetary Aggregates in the Conduct of Monetary Policy?," NBER Working Papers 5845, National Bureau of Economic Research, Inc.
  5. Ben Bernanke & Kenneth N. Kuttner, 2003. "What explains the stock market's reaction to Federal Reserve policy?," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
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  7. Angelos Kanas, 2002. "Mean and Variance Causality between Official and Parallel Currency Markets: Evidence from Four Latin American Countries," The Financial Review, Eastern Finance Association, vol. 37(2), pages 137-163, 05.
  8. Ben S. Bernanke, 1990. "On the predictive power of interest rates and interest rate spreads," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 51-68.
  9. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  10. Benjamin M. Friedman & Kenneth N. Kuttner, 1998. "Indicator Properties Of The Paper-Bill Spread: Lessons From Recent Experience," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 34-44, February.
  11. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  12. Weber, Christian E, 1998. "Consumption Spending and the Paper-Bill Spread: Theory and Evidence," Economic Inquiry, Western Economic Association International, vol. 36(4), pages 575-89, October.
  13. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  14. Hess, Gregory D. & Porter, Richard D., 1993. "Comparing interest-rate spreads and money growth as predictors of output growth: Granger causality in the sense Granger intended," Journal of Economics and Business, Elsevier, vol. 45(3-4), pages 247-268.
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