A Comparison of US and Hong Kong Cap-Floor Volatility Dynamics

Paul McNelis () and Salih Neftci

No 42004, Working Papers from Hong Kong Institute for Monetary Research

Abstract: In this paper we investigate the dynamics of Hong Kong cap-floor volatilities and compare their dynamics with the US cap-floor volatilities. We use linear and non-linear factor models and VAR¡¦s. The results show that the first principal components, both linear and non-linear, do a very good job in explaining the dynamics of the volatility curve and but there is not much to be gained by moving to non-linear models for the case of Hong Kong data. Secondly, we see that Hong Kong cap-floor volatilities cannot be obtained from the USD cap-floor volatilities by simply adding a volatility spread. The two sets of volatilities are non-trivially related to each other.

Keywords: Cap-floor volatilities; linear and non-linear principal components (search for similar items in EconPapers)
Pages: 13 pages
Date: 2004-02
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