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A Comparison of US and Hong Kong Cap-Floor Volatility Dynamics

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Author Info

  • Paul McNelis

    (Georgetown University)

  • Salih Neftci

    (City University of New York)

Abstract

In this paper we investigate the dynamics of Hong Kong cap-floor volatilities and compare their dynamics with the US cap-floor volatilities. We use linear and non-linear factor models and VAR¡¦s. The results show that the first principal components, both linear and non-linear, do a very good job in explaining the dynamics of the volatility curve and but there is not much to be gained by moving to non-linear models for the case of Hong Kong data. Secondly, we see that Hong Kong cap-floor volatilities cannot be obtained from the USD cap-floor volatilities by simply adding a volatility spread. The two sets of volatilities are non-trivially related to each other.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 042004.

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Length: 13 pages
Date of creation: Feb 2004
Date of revision:
Handle: RePEc:hkm:wpaper:042004

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Related research

Keywords: Cap-floor volatilities; linear and non-linear principal components;

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  1. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
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