Cross- and auto-correlation effects arising from averaging: the case of US interest rates and equity duration
AbstractMost available monthly interest data series consist of monthly averages of daily observations. It is well known that this averaging introduces spurious autocorrelation in the first differences of the series. It is exactly this differenced series that one is interested in when estimating interest rate risk exposures, for example. This paper presents a method to filter this autocorrelation component from the averaged series. In addition, the potential effect of averaging on duration analysis is investigated, namely, when estimating the relationship between interest rates and financial market variables like equity or bond prices or exchange rates. In contrast to interest rates the latter price series are readily available in ultimo monthly form. It is found that combining monthly returns on market variables with changes in averaged interest rates leads to substantial biases in estimated correlations (R2), regression coefficients (durations) and their significance (t-statistics). These theoretical findings are confirmed by an empirical investigation of US interest rates and their relationship with US equities (S&P 500 Index).
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Financial Economics.
Volume (Year): 13 (2003)
Issue (Month): 4 ()
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Other versions of this item:
- Winfried G. Hallerbach, 2000. "Cross- and Auto-Correlation Effects arising from Averaging: The Case of US Interest Rates and Equity Duration," Tinbergen Institute Discussion Papers 00-064/2, Tinbergen Institute.
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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