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A Comparison of US and Hong Kong Cap-Floor Volatility Dynamics

Author

Listed:
  • Paul McNelis

    (Georgetown University)

  • Salih Neftci

    (City University of New York)

Abstract

In this paper we investigate the dynamics of Hong Kong cap-floor volatilities and compare their dynamics with the US cap-floor volatilities. We use linear and non-linear factor models and VAR¡¦s. The results show that the first principal components, both linear and non-linear, do a very good job in explaining the dynamics of the volatility curve and but there is not much to be gained by moving to non-linear models for the case of Hong Kong data. Secondly, we see that Hong Kong cap-floor volatilities cannot be obtained from the USD cap-floor volatilities by simply adding a volatility spread. The two sets of volatilities are non-trivially related to each other.

Suggested Citation

  • Paul McNelis & Salih Neftci, 2004. "A Comparison of US and Hong Kong Cap-Floor Volatility Dynamics," Working Papers 042004, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:042004
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    References listed on IDEAS

    as
    1. Granger, C. W. J., 1980. "Testing for causality : A personal viewpoint," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 329-352, May.
    2. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
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