Evidence for state transition and altered serial codependence in US$ interest rates

Riccardo Rebonato and Jian Chen

Quantitative Finance, 2009, vol. 9, issue 3, 259-278

Abstract: This paper studies the codependence among, and drawdown and drawup properties of, US$ interest rates. The problem is attacked from the angle of regime switching. Different regimes are identified using the Hidden Markov Models (HMMs). The statistical properties in each state are examined separately and reconciled to form a coherent picture. We found that high fractions of reversals exist in the normal state and that consecutive bursts exist in the excited state. In large drawdowns and drawups (draws), long draws tend to be 'democratic', short draws tend to be 'oligarchic' and medium-size draws stay in either 'democratic' or 'oligarchic' mode, while conditionally independent draws are rarely found. We also investigated the distributions of draws. We found that HMMs recover the draw properties well and that the overall distribution of draws is an informationally-rich indicator about the correlation regime(s) in the various Markov states.

Keywords: US$ interest rates; Codependence; Drawdown; Drawup; Hidden Markov models (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/14697680802454692 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:9:y:2009:i:3:p:259-278

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RQUF20

DOI: 10.1080/14697680802454692

Access Statistics for this article

Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral

More articles in Quantitative Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().