Multivariate Term Structure Models with Level and Heteroskedasticity Effects
29 Pages Posted: 22 Oct 2002
Date Written: October 2002
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 gamma'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
JEL Classification: C32, E43, G12
Suggested Citation: Suggested Citation
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