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An empirical investigation of the level effect in Australian interest rates

Gray, P. & Smith, D. R. (2008) An empirical investigation of the level effect in Australian interest rates. Australian Journal of Management, 33(1), pp. 31-45.

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Abstract

An extensive literature examines the dynamics of interest rates, with particular attention given to the positive relationship between interest-rate volatility and the level of interest rates—the so-called level effect. This paper examines the interaction between the estimated level effect and competing parameterisations of interest-rate volatility for the Australian yield curve. We adopt a new methodology that estimates elasticity in a multivariate setting that explicitly accommodates the correlations that exist between various yield factors. Results show that significant correlations exist between the residuals of yield factors and that such correlations do indeed impact on model estimates. Within the multivariate setting, the level of the short rate is shown to be a crucial determinant of the conditional volatility of all three yield factors. Measures of model fit suggest that, in addition to the usual level effect, the incorporation of GARCH effects and possible regime shifts is important

Impact and interest:

2 citations in Scopus
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3 citations in Web of Science®

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ID Code: 31021
Item Type: Journal Article
Keywords: Term structure, Level effect, Regime shifting, GARCH, Short rate
DOI: 10.1177/031289620803300103
ISSN: 0312-8962
Subjects: Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > APPLIED ECONOMICS (140200) > Financial Economics (140207)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Economics & Finance
Copyright Owner: Sage Publications
Deposited On: 19 Feb 2010 15:10
Last Modified: 29 Feb 2012 23:56

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