Advanced Search
MyIDEAS: Login to save this paper or follow this series

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

Contents:

Author Info

  • Charlotte Christiansen

    ()
    (School of Economics and Management, University of Aarhus, Denmark and CREATES)

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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: ftp://ftp.econ.au.dk/creates/rp/07/rp07_05.pdf
Download Restriction: no

Bibliographic Info

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

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

Contact details of provider:
Web page: http://www.econ.au.dk/afn/

Related research

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

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
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.:
as in new window
  1. Baele, Lieven, 2005. "Volatility Spillover Effects in European Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 40(02), pages 373-401, June.
  2. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  3. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 12(04), pages 627-627, November.
  4. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 177-188, November.
  5. Lamoureux, Christopher G & Lastrapes, William D, 1990. "Persistence in Variance, Structural Change, and the GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 8(2), pages 225-34, April.
  6. Veronika Czellar & G. Andrew Karolyi & Elvezio Ronchetti, 2005. "Indirect Robust Estimation of the Short-term interest Rate Process," FAME Research Paper Series, International Center for Financial Asset Management and Engineering rp135, International Center for Financial Asset Management and Engineering.
  7. Bali, Turan G. & Wu, Liuren, 2006. "A comprehensive analysis of the short-term interest-rate dynamics," Journal of Banking & Finance, Elsevier, Elsevier, vol. 30(4), pages 1269-1290, April.
  8. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1980. " An Analysis of Variable Rate Loan Contracts," Journal of Finance, American Finance Association, American Finance Association, vol. 35(2), pages 389-403, May.
  9. Gray, Stephen F., 1996. "Modeling the conditional distribution of interest rates as a regime-switching process," Journal of Financial Economics, Elsevier, Elsevier, vol. 42(1), pages 27-62, September.
  10. Ferreira, Miguel A., 2005. "Forecasting the comovements of spot interest rates," Journal of International Money and Finance, Elsevier, Elsevier, vol. 24(5), pages 766-792, September.
  11. Andrew Ang & Geert Bekaert, 1998. "Regime Switches in Interest Rates," NBER Working Papers 6508, National Bureau of Economic Research, Inc.
  12. Longstaff, Francis A & Schwartz, Eduardo S, 1992. " Interest Rate Volatility and the Term Structure: A Two-Factor General Equilibrium Model," Journal of Finance, American Finance Association, American Finance Association, vol. 47(4), pages 1259-82, September.
  13. Brenner, Robin J. & Harjes, Richard H. & Kroner, Kenneth F., 1996. "Another Look at Models of the Short-Term Interest Rate," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 31(01), pages 85-107, March.
  14. Christiansen, Charlotte, 2002. "Regime Switching in the Yield Curve," Finance Working Papers, University of Aarhus, Aarhus School of Business, Department of Business Studies 02-13, University of Aarhus, Aarhus School of Business, Department of Business Studies.
  15. Smith, Daniel R, 2002. "Markov-Switching and Stochastic Volatility Diffusion Models of Short-Term Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(2), pages 183-97, April.
  16. Gregory R. Duffee, 1994. "Idiosyncratic variation of Treasury bill yields," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 94-28, Board of Governors of the Federal Reserve System (U.S.).
  17. Chan, K C, et al, 1992. " An Empirical Comparison of Alternative Models of the Short-Term Interest Rate," Journal of Finance, American Finance Association, American Finance Association, vol. 47(3), pages 1209-27, July.
  18. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, Elsevier, vol. 64(1-2), pages 307-333.
  19. Bali, Turan G., 2000. "Testing the Empirical Performance of Stochastic Volatility Models of the Short-Term Interest Rate," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 35(02), pages 191-215, June.
  20. Nowman, K. Ben & Saltoglu, Burak, 2003. "Continuous time and nonparametric modelling of U.S. interest rate models," International Review of Financial Analysis, Elsevier, Elsevier, vol. 12(1), pages 25-34.
  21. Martin Sola & Fabio Spagnolo & Nicola Spagnolo, 2002. "A Test for Volatility Spillovers," Economics and Finance Discussion Papers, Economics and Finance Section, School of Social Sciences, Brunel University 02-04, Economics and Finance Section, School of Social Sciences, Brunel University.
  22. Nowman, K. Ben & Sorwar, Ghulam, 2005. "Derivative prices from interest rate models: results for Canada, Hong Kong, and United States," International Review of Financial Analysis, Elsevier, Elsevier, vol. 14(4), pages 428-438.
  23. Christiansen, Charlotte, 2005. "Multivariate term structure models with level and heteroskedasticity effects," Journal of Banking & Finance, Elsevier, Elsevier, vol. 29(5), pages 1037-1057, May.
  24. Engsted, Tom & Tanggaard, Carsten, 2007. "The comovement of US and German bond markets," International Review of Financial Analysis, Elsevier, Elsevier, vol. 16(2), pages 172-182.
  25. Jedrzej Białkowski & Dobromił Serwa, 2005. "Financial contagion, spillovers and causality in the Markov switching framework," Quantitative Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 5(1), pages 123-131.
  26. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, Econometric Society, vol. 53(2), pages 385-407, March.
  27. Andersen, Torben G. & Lund, Jesper, 1997. "Estimating continuous-time stochastic volatility models of the short-term interest rate," Journal of Econometrics, Elsevier, Elsevier, vol. 77(2), pages 343-377, April.
  28. Durham, Garland B., 2003. "Likelihood-based specification analysis of continuous-time models of the short-term interest rate," Journal of Financial Economics, Elsevier, Elsevier, vol. 70(3), pages 463-487, December.
  29. Dell'Aquila, Rosario & Ronchetti, Elvezio & Trojani, Fabio, 2003. "Robust GMM analysis of models for the short rate process," Journal of Empirical Finance, Elsevier, Elsevier, vol. 10(3), pages 373-397, May.
  30. Ramchand, Latha & Susmel, Raul, 1998. "Volatility and cross correlation across major stock markets," Journal of Empirical Finance, Elsevier, Elsevier, vol. 5(4), pages 397-416, October.
  31. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, Econometric Society, vol. 37(3), pages 424-38, July.
  32. Hans Dewachter, 1996. "Modelling interest rate volatility: Regime switches and level links," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 132(2), pages 236-258, September.
  33. Sun, Licheng, 2005. "Regime shifts in interest rate volatility," Journal of Empirical Finance, Elsevier, Elsevier, vol. 12(3), pages 418-434, June.
  34. Koedijk, C.G. & Nissen, F. & Schotman, P.C. & Wolff, C.C.P., 1997. "The dynamics of short-term interest rate volatility reconsidered," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-3108628, Tilburg University.
  35. Cai, Jun, 1994. "A Markov Model of Switching-Regime ARCH," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 12(3), pages 309-16, July.
  36. Dahlquist, Magnus & Gray, Stephen F., 2000. "Regime-switching and interest rates in the European monetary system," Journal of International Economics, Elsevier, Elsevier, vol. 50(2), pages 399-419, April.
  37. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 987-1007, July.
  38. Brennan, Michael J. & Schwartz, Eduardo S., 1980. "Analyzing Convertible Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 15(04), pages 907-929, November.
  39. Susmel, Raul, 2000. "Switching Volatility in Private International Equity Markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 5(4), pages 265-83, October.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Chua, Chew Lian & Suardi, Sandy & Tsiaplias, Sarantis, 2013. "Predicting short-term interest rates using Bayesian model averaging: Evidence from weekly and high frequency data," International Journal of Forecasting, Elsevier, Elsevier, vol. 29(3), pages 442-455.
  2. Jørgensen, Peter Løchte & De Giovanni, Domenico, 2008. "Time Charters with Purchase Options in Shipping: Valuation and Risk Management," Finance Research Group Working Papers, University of Aarhus, Aarhus School of Business, Department of Business Studies F-2008-05, University of Aarhus, Aarhus School of Business, Department of Business Studies.
  3. Nowman, K.B. & Yahia, B.B.H., 2008. "Euro and FIBOR interest rates: A continuous time modelling analysis," International Review of Financial Analysis, Elsevier, Elsevier, vol. 17(5), pages 1029-1035, December.
  4. Perignon, Christophe & Smith, Daniel R., 2007. "Yield-factor volatility models," Journal of Banking & Finance, Elsevier, Elsevier, vol. 31(10), pages 3125-3144, October.
  5. B. Craven & Sardar Islam, 2008. "A model for stock market returns: non-Gaussian fluctuations and financial factors," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 30(4), pages 355-370, May.
  6. Hammoudeh, Shawkat & Bhar, Ramaprasad & Thompson, Mark A., 2010. "Re-examining the dynamic causal oil-macroeconomy relationship," International Review of Financial Analysis, Elsevier, Elsevier, vol. 19(4), pages 298-305, September.
  7. Høg, Esben, 2008. "Volatility and realized quadratic variation of differenced returns : A wavelet method approach," Finance Research Group Working Papers, University of Aarhus, Aarhus School of Business, Department of Business Studies F-2008-06, University of Aarhus, Aarhus School of Business, Department of Business Studies.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:aah:create:2007-05. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.