The Dynamics of Short-Term Interest Rate Volatility Reconsidered

Posted: 15 Sep 1999

See all articles by Kees C. G. Koedijk

Kees C. G. Koedijk

Tilburg University - Department of Finance

Francois Nissen

MeesPierson Investment Bank

Peter C. Schotman

Maastricht University - Department of Finance

Christian C. P. Wolff

University of Luxembourg - Luxembourg School of Finance; Centre for Economic Policy Research (CEPR)

Date Written: August 1994

Abstract

In this paper we present and estimate a model of short-term interest rate volatility, that encompasses both the level effect of Chan, Karolyi, Longstaff and Sanders (1992) and the conditional heteroskedasticity effect of the GARCH class of models. This flexible specification allows different effects to dominate as the level of the interest rate varies. We also investigate implications for the pricing of discount bond options. Our findings indicate that the inclusion of a volatility effect in addition to a level effect in the model specification is particularly relevant for the pricing of shorter-term discount bond options.

JEL Classification: E43

Suggested Citation

Koedijk, Kees G. and Nissen, Francois and Schotman, Peter C. and Wolff, Christian C. P., The Dynamics of Short-Term Interest Rate Volatility Reconsidered (August 1994). Available at SSRN: https://ssrn.com/abstract=5748

Kees G. Koedijk

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 4663048 (Phone)
+31 13 4662052 (Fax)

Francois Nissen (Contact Author)

MeesPierson Investment Bank

P.O. Box 243
1000 AE Amsterdam
Netherlands
+31 20 527 7921 (Phone)
+31 20 527 1984 (Fax)

Peter C. Schotman

Maastricht University - Department of Finance ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 388 3862 (Phone)
+31 43 388 4875 (Fax)

Christian C. P. Wolff

University of Luxembourg - Luxembourg School of Finance ( email )

4, rue Albert Borschette
Luxembourg, 1246
Luxembourg

HOME PAGE: http://www.lsf.lu

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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