Scandinavian Working Papers in Business Administration
Finance Research Group Working Papers,
University of Aarhus, Aarhus School of Business, Department of Business Studies
No F-2005-03: Level-ARCH Short Rate Models with Regime Switching: Bivariate Modeling of US and European Short Rates.
Charlotte Christiansen ()
Additional contact information
Charlotte Christiansen: Department of Accounting, Aarhus School of Business, Postal: The Aarhus School of Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Abstract: This paper introduces regime switching volatility into level- ARCH models for the short rates of the US, the UK, and Germany. Once regime switching and level effects are included there are no gains from including ARCH effects. It is of secondary importance exactly how the regime switching is specified. The estimated level parameters are very different across countries. The corresponding new bivariate models for the US and UK short rates show that the states of the US and UK short rate volatilities are not independent nor identical. Equivalently, the US and German volatility states are neither independent nor identical
Keywords: Bivariate short-rate model; International short rates; Level-ARCH model; Regime switching
48 pages, September 23, 2005
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