Scandinavian Working Papers in Business Administration
Finance Working Papers,
University of Aarhus, Aarhus School of Business, Department of Business Studies
No 02-19: Multivariate Term Structure Models with Level and Heteroskedasticity Effects
Charlotte Christiansen ()
Additional contact information
Charlotte Christiansen: Department of Finance, Aarhus School of Business, Postal: Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Abstract: The paper introduces and estimates a multivariate level-GARCH model for the long rate and the term structure spread where the conditional volatility is proportional
to the y’th power of the variable itself (level effects) and the conditional covariance
matrix evolves according to a multivariate GARCH process (heteroskedasticity effects).
The conditional long rate variance exhibits heteroskedasticity effects and level effects in
accordance with the square-root model. The conditional spread variance exhibits heteroskedasticity
effects but no level effects. The level-GARCH model is preferred above the
GARCH model and the level model. GARCH effects are more important than level effects.
Keywords: Heteroskedasticity effects; Level effects; Multivariate level-GARCH model; Two-factor term structure model
29 pages, May 9, 2003
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