Testing For Asymmetry In Interest Rate Volatility In The Presence Of A Neglected Level Effect
AbstractEmpirical evidence documents a level effect in the volatility of short term rates of interest. That is, volatility is positively correlated with the level of the short term interest rate. Using Monte-Carlo simulations this paper examines the performance of the commonly used Engle-Ng (1993) tests which differentiate the effect of good and bad news on the predictability of future short rate volatility. Our results show that the tests exhibit serious size distortions and loss of power in the face of a neglected level effect.
Download InfoIf 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.
Bibliographic InfoPaper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 945.
Length: 16 pages
Date of creation: 2005
Date of revision:
Contact details of provider:
Postal: Department of Economics, The University of Melbourne, 5th Floor, Economics and Commerce Building, Victoria, 3010, Australia
Phone: +61 3 8344 5289
Fax: +61 3 8344 6899
Web page: http://www.economics.unimelb.edu.au
More information through EDIRC
Level Effects; Asymmetry; Engle-Ng Tests;
Find related papers by JEL classification:
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-03-18 (All new papers)
- NEP-CFN-2006-03-18 (Corporate Finance)
- NEP-ECM-2006-03-18 (Econometrics)
- NEP-ETS-2006-03-18 (Econometric Time Series)
- NEP-FIN-2006-03-18 (Finance)
- NEP-MAC-2006-03-18 (Macroeconomics)
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.:
- Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
- Brenner, Robin J. & Harjes, Richard H. & Kroner, Kenneth F., 1996. "Another Look at Models of the Short-Term Interest Rate," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 85-107, March.
- Brooks, C. & Henry, O.T., 1999.
"Can Portemanteau Nonlinearity Tests Serve as General Mis-Specification Tests? Evidence from Symmetric and Asymmetric GARCH Models,"
Department of Economics - Working Papers Series
723, The University of Melbourne.
- Brooks, Chris & Henry, Olan T., 2000. "Can portmanteau nonlinearity tests serve as general mis-specification tests?: Evidence from symmetric and asymmetric GARCH models," Economics Letters, Elsevier, vol. 67(3), pages 245-251, June.
- Brooks, Chris & Henry, Olan T, 2002.
" The Impact of News on Measures of Undiversifiable Risk: Evidence from the UK Stock Market,"
Oxford Bulletin of Economics and Statistics,
Department of Economics, University of Oxford, vol. 64(5), pages 487-507, December.
- Brooks, C. & Henry, O.T., 2000. "The Impact of News on Measures of Undiversifiable Risk: Evidence from the UK Stock Market," Department of Economics - Working Papers Series 733, The University of Melbourne.
- Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993.
"On the relation between the expected value and the volatility of the nominal excess return on stocks,"
157, Federal Reserve Bank of Minneapolis.
- Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
- Olan Henry, 1998.
"Modelling the asymmetry of stock market volatility,"
Applied Financial Economics,
Taylor & Francis Journals, vol. 8(2), pages 145-153.
- Henry, O.T.J., 1995. "Modelling the Assymetry of Stock Market Volatility," Department of Economics - Working Papers Series 487, The University of Melbourne.
- Geert Bekaert & Robert J. Hodrick & David A. Marshall, 1997.
""Peso Problem" Explanations for Term Structure Anomalies,"
NBER Working Papers
6147, National Bureau of Economic Research, Inc.
- Bekaert, Geert & Hodrick, Robert J. & Marshall, David A., 2001. "Peso problem explanations for term structure anomalies," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 241-270, October.
- Geert Bekaert & Robert J. Hodrick & David A. Marshall, 1997. ""Peso problem" explanations for term structure anomalies," Working Paper Series, Issues in Financial Regulation WP-97-07, Federal Reserve Bank of Chicago.
- Kroner, Kenneth F & Ng, Victor K, 1998. "Modeling Asymmetric Comovements of Asset Returns," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 817-44.
- Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
- Chan, K C, et al, 1992.
" An Empirical Comparison of Alternative Models of the Short-Term Interest Rate,"
Journal of Finance,
American Finance Association, vol. 47(3), pages 1209-27, July.
- Tom Doan, . "RATS programs to replicate CKLS(1992) estimation of interest rate models," Statistical Software Components RTZ00035, Boston College Department of Economics.
- Olan T. Henry & Nilss Olekalns & Sandy Suardi, 2005.
"Equity Return and Short-Term Interest Rate Volatility : Level Effects and Asymmetric Dynamics,"
Department of Economics - Working Papers Series
941, The University of Melbourne.
- Sandy Suardi & O.T.Henry & N. Olekalns, . "Equity Return and Short-Term Interest Rate Volatility: Level Effects and Asymmetric Dynamics," MRG Discussion Paper Series 0206, School of Economics, University of Queensland, Australia.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marisa Cerantola).
If references are entirely missing, you can add them using this form.