Stochastic Volatility in a Macro-Finance Model of the US Term Structure of Interest Rates 1961-2004
This paper generalizes the standard homoscedastic macro-finance model by allowing for stochastic volatility, using the ‘square root’ specification of the mainstreamfinance literature. Empirically, this specification dominates the standard model because it is consistent with the square root volatility found in macroeconomic time series. Thus it establishes an important connection between the stochastic volatility of the mainstream finance model and macroeconomic volatility of the Okun (1971) - Friedman (1977) type. This research opens the way to a richer specification of both macroeconomic and term structure models, incorporating the best features of both macro-finance and mainstream-finance models.
|Date of creation:||Nov 2007|
|Date of revision:|
|Contact details of provider:|| Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom|
Phone: (0)1904 323776
Web page: http://www.york.ac.uk/economics/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:yor:yorken:07/32. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paul Hodgson)
If references are entirely missing, you can add them using this form.