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Volatility estimates of the short term interest rate with an application to German data

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  • Dankenbring, Henning
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    Abstract

    This paper proposes a procedure for testing alternative specifications of the short term interest rate's dynamics which takes into account that according to some restrictions the interest rate is nonstationary, i.e. the traditional test statistic has a non-standard distribution. Moreover, we do not take the specification of the mean equation as given by the theory but rather base the decision of the lag structure on a robust Lagrange Multiplier test. In contrast to U.S. data we find that the volatility depends on either the interest rate level or information shocks but not on both. Finally, we propose to describe the short term interest rate's dynamics by means of an AR(1) model with stochastic volatility. --

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    Bibliographic Info

    Paper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 1998,96.

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    Date of creation: 1998
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    Handle: RePEc:zbw:sfb373:199896

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    Related research

    Keywords: Term Structure Models; Stochastic Volatility; ARCH;

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    1. BROZE, Laurence & SCAILLET, Olivier & ZAKOIAN , Jean-Michel, 1993. "Testing for Continuous-Time Models of the Short-Term Interest Rate," CORE Discussion Papers 1993031, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Pfann, Gerard A. & Schotman, Peter C. & Tschernig, Rolf, 1996. "Nonlinear interest rate dynamics and implications for the term structure," Journal of Econometrics, Elsevier, vol. 74(1), pages 149-176, September.
    3. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-26, February.
    4. Engsted, Tom & Tanggaard, Carsten, 1994. "Cointegration and the US term structure," Journal of Banking & Finance, Elsevier, vol. 18(1), pages 167-181, January.
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