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Volatility Estimates of the Short-Term Interest Rate with an Application to German Data
Credit and Capital Markets – Kredit und Kapital, Vol. 33 (2000), Iss. 4 : pp. 548–570
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Henning Dankenbring, Frankfurt/M.
References
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Abstract
This paper proposes a procedure for testing alternative specifications of the short-term interest rate’s dynamics which takes into account the non-stationarity of the interest rate process for certain restrictions, i.e. the traditional test statistic has a non-standard distribution. Moreover, we do not take the specification of the mean equation as given by the theory but rather base the choice of the lag structure on a robust Lagrange Multiplier test. In contrast to U.S. data we find that the volatility depends either on the interest rate level or on information shocks but not on both. Finally, we propose to describe the short-term interest rate’s dynamics by means of an AR(1) model with stochastic volatility. (JEL C2, E4, G1)