Advanced Search
MyIDEAS: Login

Interest Rate Volatility and Nominalization

Contents:

Author Info

  • Viviana Fernández

    ()

Abstract

Most Latin American economies in the 1980’s and early 1990’s were burdened with extremely high inflation rates. Chile’s strategy to strengthen its financial market was to rely on inflation-linked securities. Indeed, indexation pervaded the whole economy for almost thirty years. However, the sharp decrease in the annual inflation rate over the last decade— from 26 percent in 1990 to 4 percent in 2001—led the Central Bank of Chile to set its monetary policy interest rate in nominal terms from August 2001 onwards. This paper analyzes the effect of nominalization on the behavior of nominal and inflation-linked interest rates. We find that nominalization has made nominal interest rates less volatile, while the opposite holds for inflation-linked interest rates. We use different volatility measures, and test the presence of structural breaks in unconditional variance by the Iterative Cumulative Sums of Squares (ICSS) algorithm. In addition, we model the co-movements of short and long maturity interest rates in the presence of volatility breakpoints. We also show that deposits in Chilean pesos have now a higher share of total deposits, and that trading of derivatives to hedge inflation risk has become much more active since nominalization took place. At the same time, the market of derivatives on interest rates also seems to have taken off.

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: http://www.dii.uchile.cl/~cea/sitedev/cea/www/download.php?file=documentos_trabajo/ASOCFILE120030410151012.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 153.

as in new window
Length:
Date of creation: 2003
Date of revision:
Handle: RePEc:edj:ceauch:153

Contact details of provider:
Web page: http://www.dii.uchile.cl/cea/
More information through EDIRC

Related research

Keywords:

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. Harvey, Andrew & Ruiz, Esther & Shephard, Neil, 1994. "Multivariate Stochastic Variance Models," Review of Economic Studies, Wiley Blackwell, vol. 61(2), pages 247-64, April.
  2. 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, vol. 35(02), pages 191-215, June.
  3. Engle, Robert F., 1984. "Wald, likelihood ratio, and Lagrange multiplier tests in econometrics," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 13, pages 775-826 Elsevier.
  4. Aggarwal, Reena & Inclan, Carla & Leal, Ricardo, 1999. "Volatility in Emerging Stock Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 33-55, March.
  5. Clifford A. Ball & Walter N. Torous, 1999. "The Stochastic Volatility of Short-Term Interest Rates: Some International Evidence," Journal of Finance, American Finance Association, vol. 54(6), pages 2339-2359, December.
  6. Bollerslev, Tim & Engle, Robert F. & Nelson, Daniel B., 1986. "Arch models," Handbook of Econometrics, in: R. F. Engle & D. McFadden (ed.), Handbook of Econometrics, edition 1, volume 4, chapter 49, pages 2959-3038 Elsevier.
Full references (including those not matched with items on IDEAS)

Citations

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:edj:ceauch:153. 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.