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Evidence for state transition and altered serial codependence in US$ interest rates

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  • Riccardo Rebonato
  • Jian Chen

Abstract

This paper studies the codependence among, and drawdown and drawup properties of, US$ interest rates. The problem is attacked from the angle of regime switching. Different regimes are identified using the Hidden Markov Models (HMMs). The statistical properties in each state are examined separately and reconciled to form a coherent picture. We found that high fractions of reversals exist in the normal state and that consecutive bursts exist in the excited state. In large drawdowns and drawups (draws), long draws tend to be 'democratic', short draws tend to be 'oligarchic' and medium-size draws stay in either 'democratic' or 'oligarchic' mode, while conditionally independent draws are rarely found. We also investigated the distributions of draws. We found that HMMs recover the draw properties well and that the overall distribution of draws is an informationally-rich indicator about the correlation regime(s) in the various Markov states.

Suggested Citation

  • Riccardo Rebonato & Jian Chen, 2009. "Evidence for state transition and altered serial codependence in US$ interest rates," Quantitative Finance, Taylor & Francis Journals, vol. 9(3), pages 259-278.
    • Handle: RePEc:taf:quantf:v:9:y:2009:i:3:p:259-278
    DOI: 10.1080/14697680802454692
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    References listed on IDEAS

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    1. Riccardo Rebonato & Valerio Gaspari, 2006. "Analysis of drawdowns and drawups in the US$ interest-rate market," Quantitative Finance, Taylor & Francis Journals, vol. 6(4), pages 297-326.
    2. Johansen, Anders, 2004. "Origin of crashes in three US stock markets: shocks and bubbles," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 338(1), pages 135-142.
    3. Anders Johansen, 2004. "Origin of Crashes in 3 US stock markets: Shocks and Bubbles," Papers cond-mat/0401210, arXiv.org.
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    Cited by:

    1. Stephan Schwill, 2018. "Entropy Analysis of Financial Time Series," Papers 1807.09423, arXiv.org.

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