Modelling conditional heteroscedasticity and jumps in Australian short-term interest rates

Chan, K. F. (2005) Modelling conditional heteroscedasticity and jumps in Australian short-term interest rates. Accounting and Finance, 45 4: 537-551. doi:10.1111/j.1467-629X.2005.00153.x


Author Chan, K. F.
Title Modelling conditional heteroscedasticity and jumps in Australian short-term interest rates
Journal name Accounting and Finance   Check publisher's open access policy
ISSN 0810-5391
1467-629X
0110-5159
Publication date 2005-12
Sub-type Article (original research)
DOI 10.1111/j.1467-629X.2005.00153.x
Volume 45
Issue 4
Start page 537
End page 551
Total pages 15
Place of publication Richmond, Vic., Australia
Publisher Wiley-Blackwell
Language eng
Abstract The present paper explores a class of jump-diffusion models for the Australian shortterm interest rate. The proposed general model incorporates linear mean-reverting drift, time-varying volatility in the form of LEVELS (sensitivity of the volatility to the levels of the short-rates) and generalized autoregressive conditional heteroscedasticity (GARCH), as well as jumps, to match the salient features of the short-rate dynamics. Maximum likelihood estimation reveals that pure diffusion models that ignore the jump factor are mis-specified in the sense that they imply a spuriously high speed of mean-reversion in the level of short-rate changes as well as a spuriously high degree of persistence in volatility. Once the jump factor is incorporated, the jump models that can also capture the GARCH-induced volatility produce reasonable estimates of the speed of mean reversion. The introduction of the jump factor also yields reasonable estimates of the GARCH parameters. Overall, the LEVELS-GARCH-JUMP model fits the data best.
Keyword Generalized autoregressive conditional heteroscedasticity
Jump-diffusion
LEVELS effect
Short-rate
Q-Index Code C1
Q-Index Status Provisional Code
Institutional Status Unknown

Document type: Journal Article
Sub-type: Article (original research)
Collection: UQ Business School Publications
 
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Created: Tue, 08 Feb 2011, 00:34:04 EST by Dr Kam Chan on behalf of UQ Business School