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Transmission of Volatility of Money Market Overnight Repo Rate along the Yield Curve in Pakistan

Author

Listed:
  • Asif Mahmood

    () (State Bank of Pakistan)

Abstract

This paper presents the empirical results of the volatility transmission of money market overnight repo rate along the yield curve in Pakistan. The results indicate that the transmission of volatility of overnight repo rate is higher at the shorter end of the yield curve compared to the longer end. These results are in line with empirical findings of volatility transmission of interest rates found in other countries. The results also suggest that the pass-through level of transmission of volatility from overnight repo rate to short and long term interest rates has decreased after State Bank of Pakistan (SBP) adopted the interest rate corridor framework in August 2009. The empirical findings show that the subsequent changes introduced in the current operational framework of SBP has further improved the signaling mechanism of SBP’s monetary policy stance to financial markets. These results indicate the smooth transmission of changes in SBP policy rate to short and long term market interest rates without spreading the unwarranted volatility across the yield curve.

Suggested Citation

  • Asif Mahmood, 2015. "Transmission of Volatility of Money Market Overnight Repo Rate along the Yield Curve in Pakistan," SBP Working Paper Series 71, State Bank of Pakistan, Research Department.
  • Handle: RePEc:sbp:wpaper:71
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    File URL: http://www.sbp.org.pk/repec/sbp/wpaper/wp71.pdf
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    Keywords

    Monetary policy; volatility; yield curve; GARCH;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G1 - Financial Economics - - General Financial Markets

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