Scandinavian Working Papers in Business Administration
Finance Working Papers,
University of Aarhus, Aarhus School of Business, Department of Business Studies
No 02-3: Revisiting the shape of the yield curve: the effect of interest rate volatility.
Charlotte Christiansen () and Jesper Lund
Additional contact information
Charlotte Christiansen: Department of Finance, Aarhus School of Business, Postal: Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Jesper Lund: Nykredit Bank, Postal: Nykredit Bank, Denmark
Abstract: This paper examines the relationship between interest-rate volatility and the shape of the yield curve. The yield curve is parsimoniously described by its level, slope, and curvature. The level, the slope and the curvature are analyzed within a trivariate heteroskedastic model, where the conditional short-rate volatility is included in the mean specification. The slope and the curvature depend positively and significantly on the short-rate volatility. The effect of the interest rate volatility is more pronounced for the curvature than for the slope. Differences between subperiods are explored, as are differences across the maturity spectrum.
Keywords: Multivariate GARCH-M; Short-Rate Volatility; Yield Curve Curvature; Yield Curve Shape; Yield Curve Slope
28 pages, March 13, 2002
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