South African Historical Interest Rate Volatility - Evidence of Regime- Switching

Storme Kennedy-Palmer

Studies in Economics and Econometrics, 2019, vol. 43, issue 3, 111-132

Abstract: Accurate estimates of volatility are important for the valuation and risk management of financial assets. The benchmark interest rate for many assets in South Africa, the 3-month Jibar, is found to exhibit a high volatility persistence when modelled with a standard generalised autoregressive conditional heteroskedasticity (GARCH) process. The literature suggests that unobserved regime-switching in interest rate data may lead to an overestimation of volatility persistence. In this study 120 GARCH-type volatility models are tested to determine which model, conditional distribution and number of regimes best fit the data in order to extract the most accurate in-sample estimation of historical volatility for asset pricing. The data analysed consists of 877 weekly observations of 3-month Jibar in total, spanning from September 2001 to July 2018. The switching between regimes is governed by a Markov chain process which produces state-dependent transition probabilities for the unobserved regimes. The study finds that a standard single regime GARCH model may not capture the underlying volatility dynamics of the interest rate. The best performing model in this study is the 4 State Threshold-GARCH indicating that in addition to evidence of regime-switching in the data, there is an asymmetric reaction to negative information.

Date: 2019
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/10800379.2019.12097353 (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:rseexx:v:43:y:2019:i:3:p:111-132

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/rsee20

DOI: 10.1080/10800379.2019.12097353

Access Statistics for this article

Studies in Economics and Econometrics is currently edited by Willem Bester

More articles in Studies in Economics and Econometrics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().