The Stochastic Volatility of Short-Term Interest Rates: Some International Evidence

This paper estimates a stochastic volatility model of short-term riskless interest rate dynamics. Estimated interest rate dynamics are broadly similar across a number of countries and reliable evidence of stochastic volatility is found throughout. In contrast to stock returns, interest rate volatili...

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Bibliographic Details
Published in:The Journal of finance (New York) 1999-12, Vol.54 (6), p.2339-2359
Main Authors: Ball, Clifford A., Torous, Walter N.
Format: Article
Language:English
Subjects:
Economic models
Empirical evidence
Estimators
Interest rate risk
Interest rates
International
Non Gaussianity
Parametric models
Short term financing
Shorter Papers
Statistical variance
Stochastic models
Studies
Treasury bills
Volatility
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Summary:This paper estimates a stochastic volatility model of short-term riskless interest rate dynamics. Estimated interest rate dynamics are broadly similar across a number of countries and reliable evidence of stochastic volatility is found throughout. In contrast to stock returns, interest rate volatility exhibits faster meanreverting behavior and innovations in interest rate volatility are negligibly correlated with innovations in interest rates. The less persistent behavior of interest rate volatility reflects the fact that interest rate dynamics are impacted by transient economic shocks such as central bank announcements and other macroeconomic news.
ISSN:0022-1082
1540-6261
DOI:10.1111/0022-1082.00191