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Empirical Investigation of Stochastic Volatility Interest Rate Models using the EMM: The Case of Korea (in Korean)

Author

Listed:
  • Chae-Shick Chung

    (Department of Economics, Sogang University)

  • Jong Sung Lee

    (Hana Financial Investment Co., Ltd)

Abstract

The purpose of this paper is to estimate and compare various continuous stochastic volatility interest rate models of Korean interest rates. The empirical methodology is the Efficient Method of Moments (EMM). The empirical results indicate that the level effect and volatility are important ingredients in the dynamics of Korean interest rates, except when using a model in which a level effect parameter is freely estimated. Therefore, very simple and manageable continuous models, for example having two-factors at most, replicate the dynamic motions of Korean interest rates in an excellent way.

Suggested Citation

  • Chae-Shick Chung & Jong Sung Lee, 2007. "Empirical Investigation of Stochastic Volatility Interest Rate Models using the EMM: The Case of Korea (in Korean)," Economic Analysis (Quarterly), Economic Research Institute, Bank of Korea, vol. 13(3), pages 41-69, September.
    • Handle: RePEc:bok:journl:v:13:y:2007:i:3:p:41-69
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    More about this item

    Keywords

    volatility; continuous-time interest rate model; EMM; level effect; SNP;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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