Between The Rock and a Hard Place: Regime Switching in the RelationshipBetween Short-Term Interest Rates and Equity Returns in the UK
AbstractWe examine the relationship between short term interest rates and UK equity returns using a two regime Markov Switching EGARCH model. We find one high-return, low variance regime in which the conditional variance of equity returns responds persistently but symmetrically to equity return innovations. In the other, low-mean, highvariance, regime there is evidence that equity volatility responds asymmetrically and without persistence to shocks to equity returns. There is evidence of a regime dependent relationship between shorter maturity interest rate differentials and equity return volatility. Furthermore, there is evidence that events in the money markets influence the probability of transition across regimes
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Bibliographic InfoPaper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1019.
Length: 33 pages
Date of creation: 2007
Date of revision:
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Postal: Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia
Phone: +61 3 8344 5355
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Web page: http://www.economics.unimelb.edu.au
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Regime switching; Time varying transition probabilities; Newsimpact surfaces; Asymmetric volatility; Interest Rate Spreads;
Find related papers by JEL classification:
- G0 - Financial Economics - - General
- C5 - Mathematical and Quantitative Methods - - Econometric Modeling
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-01-05 (All new papers)
- NEP-CBA-2008-01-05 (Central Banking)
- NEP-MON-2008-01-05 (Monetary Economics)
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