Disturbing extremal behavior of spot rate dynamics
This paper presents a study of extreme interest rate movements in the U.S. Federal Funds market over almost a half century of daily observations from the mid 1950s through the end of 2000. We analyze the fluctuations of the maximal and minimal changes in short term interest rates and test the significance of time-varying paths followed by the mean and volatility of extremes. We formally determine the relevance of introducing trend and serial correlation in the mean, and of incorporating the level and GARCH effects in the volatility of extreme changes in the federal funds rate. The empirical findings indicate the existence of volatility clustering in the standard deviation of extremes, and a significantly positive relationship between the level and the volatility of extremes. The results point to the presence of an autoregressive process in the means of both local maxima and local minima values. The paper proposes a conditional extreme value approach to calculating value at risk by specifying the location and scale parameters of the generalized Pareto distribution as a function of past information. Based on the estimated VaR thresholds, the statistical theory of extremes is found to provide more accurate estimates of the rate of occurrence and the size of extreme observations.
(This abstract was borrowed from another version of this item.)
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
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.:
- McCulloch, J Huston, 1997. "Measuring Tail Thickness to Estimate the Stable Index Alpha: A Critique," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(1), pages 74-81, January.
- Yacine Ait-Sahalia, 1995.
"Nonparametric Pricing of Interest Rate Derivative Securities,"
NBER Working Papers
5345, National Bureau of Economic Research, Inc.
- Ait-Sahalia, Yacine, 1996. "Nonparametric Pricing of Interest Rate Derivative Securities," Econometrica, Econometric Society, vol. 64(3), pages 527-560, May.
- David F. Babbel & Anthony M. Santomero, 1997. "Risk Management by Insurers: An Analysis of the Process," Center for Financial Institutions Working Papers 96-16, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Longstaff, Francis A & Schwartz, Eduardo S, 1992. " Interest Rate Volatility and the Term Structure: A Two-Factor General Equilibrium Model," Journal of Finance, American Finance Association, vol. 47(4), pages 1259-1282, September.
- C. Gourieroux & J.P. Laurent & O. Scaillet, 2000.
"Sensitivity analysis of values at risk,"
THEMA Working Papers
2000-04, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
- Christian Gourieroux & J. P. Laurent & Olivier Scaillet, 2000. "Sensitivity Analysis of Values at Risk," Econometric Society World Congress 2000 Contributed Papers 0162, Econometric Society.
- Gouriéroux, Christian & Laurent, J.P. & Scaillet, Olivier, 1999. "Sensitivity Analysis of Values at Risk," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2000002, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 00 Jan 2000.
- Christian Gourieroux & Jean-Paul Laurent & Olivier Scaillet, 2000. "Sensitivity Analysis of Values at Risk," Working Papers 2000-05, Centre de Recherche en Economie et Statistique.
- Yacine Ait-Sahalia, 1995.
"Testing Continuous-Time Models of the Spot Interest Rate,"
NBER Working Papers
5346, National Bureau of Economic Research, Inc.
- Ait-Sahalia, Yacine, 1996. "Testing Continuous-Time Models of the Spot Interest Rate," Review of Financial Studies, Society for Financial Studies, vol. 9(2), pages 385-426.
- Bali, Turan G., 2000. "Testing the Empirical Performance of Stochastic Volatility Models of the Short-Term Interest Rate," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(02), pages 191-215, June.
- Dennis W. Jansen & Casper de Vries, 1988.
"On the frequency of large stock returns: putting booms and busts into perspective,"
1989-006, Federal Reserve Bank of St. Louis.
- Jansen, Dennis W & de Vries, Casper G, 1991. "On the Frequency of Large Stock Returns: Putting Booms and Busts into Perspective," The Review of Economics and Statistics, MIT Press, vol. 73(1), pages 18-24, February.
- Stanton, Richard, 1997. " A Nonparametric Model of Term Structure Dynamics and the Market Price of Interest Rate Risk," Journal of Finance, American Finance Association, vol. 52(5), pages 1973-2002, December.
- 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 1209-1227, July.
- Tom Doan, "undated". "RATS programs to replicate CKLS(1992) estimation of interest rate models," Statistical Software Components RTZ00035, Boston College Department of Economics.
- Conley, Timothy G, et al, 1997. "Short-Term Interest Rates as Subordinated Diffusions," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 525-577.
- Phillip Kearns & Adrian Pagan, 1997. "Estimating The Density Tail Index For Financial Time Series," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 171-175, May.
- Longin, Francois M., 2000. "From value at risk to stress testing: The extreme value approach," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1097-1130, July.
- Longin, Francois M, 1996. "The Asymptotic Distribution of Extreme Stock Market Returns," The Journal of Business, University of Chicago Press, vol. 69(3), pages 383-408, July.
- Andersen, Torben G. & Lund, Jesper, 1997. "Estimating continuous-time stochastic volatility models of the short-term interest rate," Journal of Econometrics, Elsevier, vol. 77(2), pages 343-377, April.
- Jansen, Dennis W. & Koedijk, Kees G. & de Vries, Casper G., 2000. "Portfolio selection with limited downside risk," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 247-269, 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.
- Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
- McNeil, Alexander J. & Frey, Rudiger, 2000. "Estimation of tail-related risk measures for heteroscedastic financial time series: an extreme value approach," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 271-300, November.
- Christian Gollier & Pierre-François Koehl & Jean-Charles Rochet, 1996. "Risk-Taking Behavior with Limited Liability and Risk Aversion," Center for Financial Institutions Working Papers 96-13, Wharton School Center for Financial Institutions, University of Pennsylvania.
When requesting a correction, please mention this item's handle: RePEc:eee:empfin:v:10:y:2003:i:4:p:455-477. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.