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The Non-Linear Evolution of High Frequency Short Term Interest Rates

Author

Listed:
  • Peter Cripwell

    (School of Business, University College Dublin)

  • David Edelman

    (School of Business, University College Dublin)

Abstract

In this paper new results are documented regarding the short term evolution of global short term interest rates. Much work has been carried out concerning the evolution of interest rates over long time scales, on the order on one month or greater. However high frequency data has only been considered in a limited number of studies. In this study the evolution of the short term yield curve, on a day to day basis, is considered and results are presented that suggest that over these short time scales, short term interest rates exhibit non-linear autoregressive behaviour, in contradiction of the efficient markets hypothesis. In addition the high frequency data indicates that the observed co-movement across currencies of longer maturity interest rates result from a vector error correction process (VECM). Greater information on the nature of the process may be obtained by considering a non-linear VECM process. Based on the output of both non-linear uni-variate and multi-variate models, limited short term statistically significant predictions of the evolution of various short term interest rate instruments may be carried out.

Suggested Citation

  • Peter Cripwell & David Edelman, 2010. "The Non-Linear Evolution of High Frequency Short Term Interest Rates," Working Papers 200835, Geary Institute, University College Dublin.
  • Handle: RePEc:ucd:wpaper:200835
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    File URL: http://www.ucd.ie/geary/static/publications/workingpapers/gearywp200835.pdf
    File Function: First version, 2008
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    More about this item

    Keywords

    interest rates; non-linear; high frequency;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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