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Level-ARCH Short Rate Models with Regime Switching: Bivariate Modeling of US and European Short Rates

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Author Info
Charlotte Christiansen () (School of Economics and Management, University of Aarhus, Denmark and CREATES)

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Abstract

This paper introduces regime switching into level-ARCH models for the short rates of the US, the UK, and Germany. Once regime switching and level effects are included there are no gains from including ARCH effects. It is of secondary importance how the regime switching is specified. The estimated level parameters differ across countries. The corresponding new bivariate models show that the states of the US and UK short rate volatilities are not independent nor identical. There is Granger causality from the US to the UK short rate volatility state but not vice versa. There is no contagion between the US and UK volatility states. Equivalent results apply to the relation between the US and German volatility states.

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Publisher Info
Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2007-05.

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Length: 51
Date of creation: 11 May 2007
Date of revision:
Handle: RePEc:aah:create:2007-05

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Web page: http://www.econ.au.dk/afn/

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Related research
Keywords: Bivariate short-rate model; International short rates; Level-ARCH model; Regime Switching;

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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    Other versions:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. B. Craven & Sardar Islam, 2008. "A model for stock market returns: non-Gaussian fluctuations and financial factors," Review of Quantitative Finance and Accounting, Springer, vol. 30(4), pages 355-370, May. [Downloadable!] (restricted)
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