Cross- and Auto-Correlation Effects arising from Averaging: The Case of US Interest Rates and Equity Duration
AbstractMost of the available monthly interest data series consist of monthlyaverages of daily observations. It is well-known that this averaging introduces spurious autocorrelation effectsin the first differences of the series. It isexactly this differenced series we are interested in when estimatinginterest rate risk exposures e.g. This paperpresents a method to filter this autocorrelation component from theaveraged series. In addition we investigate thepotential effect of averaging on duration analysis, viz. whenestimating the relationship between interest rates andfinancial market variables like equity or bond prices. In contrast tointerest rates the latter price series are readilyavailable in ultimo month form. We find that combining monthlyreturns on market variables with changes inaveraged interest rates leads to serious biases in estimatedcorrelations (R2s), regression coefficients (durations)and their significance (t-statistics). Our theoretical findings areconfirmed by an empirical investigation of USinterest rates and their relationship with US equities (S&P 500Index).
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 00-064/2.
Date of creation: 31 Jul 2000
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Web page: http://www.tinbergen.nl
interest rates; duration; averaging; time series properties; spurious autocorrelation;
Other versions of this item:
- Winfried Hallerbach, 2003. "Cross- and auto-correlation effects arising from averaging: the case of US interest rates and equity duration," Applied Financial Economics, Taylor and Francis Journals, vol. 13(4), pages 287-294.
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-09-18 (All new papers)
- NEP-ECM-2000-09-18 (Econometrics)
- NEP-ETS-2000-09-18 (Econometric Time Series)
- NEP-FMK-2000-09-18 (Financial Markets)
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