Dynamic Risk Profile of the US Term Structure by Wavelet MRA

Sutthisit Jamdee and Cornelis Los
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Sutthisit Jamdee: Kent State University

Finance from University Library of Munich, Germany

Abstract: A careful examination of interest rate time series from different U.S. Treasury maturities by Wavelet Multiresolution Analysis (MRA) suggests that the first differences of the term structure of interest rate series are periodic or, at least, cyclic, non-stationary, long-term dependent, in particular, anti-persistent. Each nodal time series from a particular maturity has its own uniqueness and accordingly supports the Market Segmentation theory. The findings also imply that affine models are insufficient to describe the dynamics of the interest rate diffusion processes and call for more intensive research that might provide better, most likely fractal or nonlinear, term structure models for each maturity. If this is correct, empirical term structure models may describe chaotic, i.e., diffusion processes with non-unique dynamic equilibria.

Keywords: Wavelet; Interest rates; Hurst exponent; Term structure; Yield curve (search for similar items in EconPapers)
JEL-codes: E43 G10 (search for similar items in EconPapers)
Date: 2004-09-18
New Economics Papers: this item is included in nep-cmp, nep-ets and nep-fin
Note: Type of Document - pdf. Jamdee, Sutthisit and Cornelis A. Los, 'Dynamic Risk Profile of the US Term Structure by Wavelet MRA' (September 2003). Kent State University, Finance Working Paper.
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0409045

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