Multivariate Term Structure Models with Level and Heteroskedasticity Effects

No 02-19, Finance Working Papers from University of Aarhus, Aarhus School of Business, Department of Business Studies

Abstract: The paper introduces and estimates a multivariate level-GARCH model for the long rate and the term structure spread where the conditional volatility is proportional

to the y’th power of the variable itself (level effects) and the conditional covariance

matrix evolves according to a multivariate GARCH process (heteroskedasticity effects).

The conditional long rate variance exhibits heteroskedasticity effects and level effects in

accordance with the square-root model. The conditional spread variance exhibits heteroskedasticity

effects but no level effects. The level-GARCH model is preferred above the

GARCH model and the level model. GARCH effects are more important than level effects.

Keywords: Heteroskedasticity effects; Level effects; Multivariate level-GARCH model; Two-factor term structure model (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm
Date: 2003-05-09
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Related works:
Journal Article: Multivariate term structure models with level and heteroskedasticity effects (2005)
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