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Short and Long Memory in Equilibrium Interest Rate Dynamics

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Author Info
Jin-Chuan Duan
Kris Jacobs ()
Abstract

This paper analyzes a large class of processes for the short-term interest rate that are derived in a discrete-time equilibrium framework. The dynamics of interest rates and yields are driven by the dynamics of the conditional volatility of the state variable. Under appropriate parameter restrictions, interest rates derived in this framework are nonnegative. We study Markovian interest rate processes as well as more general non-Markovian processes that display short and long memory. These processes also display heteroskedasticity patterns that are more general than those of existing equilibrium models. We find that deviations from the Markovian structure significantly improve the empirical performance of the model and that the data support the presence of long memory. We also find that the data support heteroskedasticity patterns that are different from the ones present in existing equilibrium models.

Dans cet article, nous analysons une classe de processus pour le taux d'intérêt à court terme, qui sont dérivés dans un cadre d'équilibre en temps discret. La dynamique des taux d'intérêts et des rendements est commandée par la dynamique de la volatilité conditionnelle de la variable d'état. Sous des restrictions de paramètres appropriées, les taux d'intérêt dérivés dans ce cadre sont non-négatifs. Nous étudions les processus Markovien de taux d'intérêt, de même que des procédés Markoviens plus généraux, qui affichent une mémoire courte et longue. Ces processus affichent aussi des schémas d'hétéroscédasticité qui sont plus généraux que ceux des modèles d'équilibre existants. Nous trouvons que les déviations à la structure Markovienne améliorent de façon significative la performance empirique du modèle et que les données soutiennent la présence de mémoire longue. Nous trouvons également que les données soutiennent des schémas d'hétéroscédasticité qui diffèrent de ceux présents dans les modèles d'équilibre existants.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 2001s-22.

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Date of creation: 01 Mar 2001
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Handle: RePEc:cir:cirwor:2001s-22

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Keywords: Interest rate; GARCH; heteroskedasticity; long memory; nonnegativity; term structure; Taux d'intérêt; GARCH; hétéroscédasticité; mémoire longue; non-négativité; structure à terme;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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.:

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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. Javier Gil-Bazo & Gonzalo Rubio, 2003. "A Non-Parametric Dimension Test of the Term Structure," DFAEII Working Papers 200201, University of the Basque Country - Department of Foundations of Economic Analysis II. [Downloadable!]
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