Processes with volatility‐induced stationarity: an application for interest rates

João Nicolau

Statistica Neerlandica, 2005, vol. 59, issue 4, 376-396

Abstract: In this paper we propose a refinement of the existing definition of volatility‐induced stationarity that allows us to distinguish between processes with drift and diffusion induced stationarity and processes with pure volatility‐induced stationarity. We also propose a classification of stationary processes with volatility‐induced stationarity according to the volatility that is needed to inject stationarity. Processes with volatility‐induced stationarity are potentially applicable to interest rate time‐series since, as has been acknowledged, mean‐reversion effects occur mainly in periods of high volatility. As such, we provide evidence that the logarithm of the Fed funds rate can be modelled as a local martingale with volatility‐induced stationarity.

Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:bla:stanee:v:59:y:2005:i:4:p:376-396

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