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Persistence and volatility in short-term interest rates

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  • Nikolaos Panigirtzoglou
  • James Proudman
  • John Spicer
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    Abstract

    It is important for monetary policy makers to know how closely money market rates follow the policy rates they set. This paper looks at the volatility and persistence of divergences between short-term market interest rates away from policy rates. This may also offer insights into the effectiveness of various approaches that central banks employ to smooth interest rate volatility, such as requiring minimum reserves. Using data for Germany, Italy and the United Kingdom, it is found that in all three countries there are significant temporary divergences, although the average divergence is close to zero.

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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2000/wp116.pdf
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    Bibliographic Info

    Paper provided by Bank of England in its series Bank of England working papers with number 116.

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    Date of creation: Jun 2000
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    Handle: RePEc:boe:boeewp:116

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    1. Hull, John & White, Alan, 1993. "One-Factor Interest-Rate Models and the Valuation of Interest-Rate Derivative Securities," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(02), pages 235-254, June.
    2. Gibbons, Michael R & Ramaswamy, Krishna, 1993. "A Test of the Cox, Ingersoll, and Ross Model of the Term Structure," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 619-58.
    3. Hamilton, James D, 1996. "The Daily Market for Federal Funds," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 26-56, February.
    4. Brennan, Michael J. & Schwartz, Eduardo S., 1982. "An Equilibrium Model of Bond Pricing and a Test of Market Efficiency," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(03), pages 301-329, September.
    5. Nowman, K B, 1997. " Gaussian Estimation of Single-Factor Continuous Time Models of the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 52(4), pages 1695-1706, September.
    6. Chan, K C, et al, 1992. " An Empirical Comparison of Alternative Models of the Short-Term Interest Rate," Journal of Finance, American Finance Association, vol. 47(3), pages 1209-27, July.
    7. Dietrich-Campbell, Bruce & Schwartz, Eduardo, 1986. "Valuing debt options : Empirical evidence," Journal of Financial Economics, Elsevier, vol. 16(3), pages 321-343, July.
    8. Lamoureux, Christopher G & Lastrapes, William D, 1990. "Persistence in Variance, Structural Change, and the GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 225-34, April.
    9. Longstaff, Francis A., 1989. "A nonlinear general equilibrium model of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 23(2), pages 195-224, August.
    10. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
    11. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
    12. 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, vol. 31(01), pages 85-107, March.
    13. Harvey, Campbell R., 1988. "The real term structure and consumption growth," Journal of Financial Economics, Elsevier, vol. 22(2), pages 305-333, December.
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    Cited by:
    1. Anne Vila Wetherilt, 2003. "Money market operations and short-term interest rate volatility in the United Kingdom," Applied Financial Economics, Taylor & Francis Journals, vol. 13(10), pages 701-719.
    2. Anne Vila Wetherilt, 2003. "Money market operations and volatility of UK money market rates," Bank of England working papers 174, Bank of England.

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