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Revisiting the shape of the yield curve: the effect of interest rate volatility

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Abstract

This paper examines the relationship between interest-rate volatility and the shape of the yield curve. The yield curve is parsimoniously described by its level, slope, and curvature. The level, the slope and the curvature are analyzed within a trivariate heteroskedastic model, where the conditional short-rate volatility is included in the mean specification. The slope and the curvature depend positively and significantly on the short-rate volatility. The effect of the interest rate volatility is more pronounced for the curvature than for the slope. Differences between subperiods are explored, as are differences across the maturity spectrum.

Suggested Citation

  • Christiansen, Charlotte & Lund, Jesper, 2002. "Revisiting the shape of the yield curve: the effect of interest rate volatility," Finance Working Papers 02-3, University of Aarhus, Aarhus School of Business, Department of Business Studies.
  • Handle: RePEc:hhb:aarfin:2002_003
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    File URL: http://www.hha.dk/fin/finance/Research/D02_3.PDF
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    6. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305 World Scientific Publishing Co. Pte. Ltd..
    7. Engle, Robert F. & Ng, Victor K. & Rothschild, Michael, 1990. "Asset pricing with a factor-arch covariance structure : Empirical estimates for treasury bills," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 213-237.
    8. John Y. Campbell & Robert J. Shiller, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Oxford University Press, vol. 58(3), pages 495-514.
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    10. Fama, Eugene F & Bliss, Robert R, 1987. "The Information in Long-Maturity Forward Rates," American Economic Review, American Economic Association, vol. 77(4), pages 680-692, September.
    11. 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.
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    Cited by:

    1. Erlandsson, Ulf, 2002. "Regime Switches in Swedish Interest Rates," Working Papers 2002:5, Lund University, Department of Economics, revised 04 Mar 2005.
    2. Christiansen, Charlotte, 2001. "Long Maturity Forward Rates," Finance Working Papers 01-12, University of Aarhus, Aarhus School of Business, Department of Business Studies.
    3. Mascia Bedendo & Lara Cathcart & Lina El-Jahel, 2007. "The Slope Of The Term Structure Of Credit Spreads: An Empirical Investigation," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 30(2), pages 237-257.
    4. Monfort, A. & Pegoraro, F., 2007. "Switching VARMA Term Structure Models - Extended Version," Working papers 191, Banque de France.
    5. Perignon, Christophe & Smith, Daniel R., 2007. "Yield-factor volatility models," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3125-3144, October.
    6. Lenz, Rainer, 2010. "Analyse der Renditestrukturkurve: Zur Laufzeitenstruktur von Investitions- und Finanzierungsentscheidungen
      [Yield curve analysis]
      ," MPRA Paper 26621, University Library of Munich, Germany.
    7. Daniel R. Smith & Christophe Parignon, 2004. "Modeling Yield-Factor Volatility," Econometric Society 2004 Australasian Meetings 307, Econometric Society.

    More about this item

    Keywords

    Multivariate GARCH-M; Short-Rate Volatility; Yield Curve Curvature; Yield Curve Shape; Yield Curve Slope;

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