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Level-ARCH Short Rate Models with Regime Switching: Bivariate Modeling of US and European Short Rates

This paper introduces regime switching volatility into level- ARCH models for the short rates of the US, the UK, and Germany. Once regime switching and level effects are included there are no gains from including ARCH effects. It is of secondary importance exactly how the regime switching is specified. The estimated level parameters are very different across countries. The corresponding new bivariate models for the US and UK short rates show that the states of the US and UK short rate volatilities are not independent nor identical. Equivalently, the US and German volatility states are neither independent nor identical

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Paper provided by University of Aarhus, Aarhus School of Business, Department of Business Studies in its series Finance Research Group Working Papers with number F-2005-03.

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Length: 48 pages
Date of creation: 23 Sep 2005
Date of revision:
Handle: RePEc:hhb:aarbfi:2005-03
Contact details of provider: Postal: The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark
Fax: + 45 86 15 19 43
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