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.
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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:
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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
- 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)
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