Equity Return and Short-Term Interest Rate Volatility: Level Effects and Asymmetric Dynamics

Ólan Henry, Nilss Olekalns () and Sandy Suardi

No 941, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: Evidence suggests that short-term interest rate volatility peaks with the level of short rates, while equity volatility responds asymmetrically to positive and negative shocks. We present an LM based test that distinguishes between level effects and asymmetry in volatility which is robust to the presence of unidentified nuisance parameters under the null. There is strong evidence of a level effect and asymmetric response in the relationship between S&P 500 Index returns and 3-month US Treasury Bills. The conditional covariance depends on the level of the short rate which has implications for hedging equity returns against short term interest rate movements.

Keywords: Level Effects; Asymmetry; LM Tests; Davies Problem; Nonlinear Granger Causality (search for similar items in EconPapers)
JEL-codes: C12 E44 G12 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2005
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Equity Return and Short-Term Interest Rate Volatility: Level Effects and Asymmetric Dynamics
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