TESTING FOR ASYMMETRY IN INTEREST RATE VOLATILITY IN THE PRESENCE OF A NEGLECTED LEVEL EFFECT

Ólan Henry and Sandy Suardi

No 945, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: Empirical evidence documents a level effect in the volatility of short term rates of interest. That is, volatility is positively correlated with the level of the short term interest rate. Using Monte-Carlo simulations this paper examines the performance of the commonly used Engle-Ng (1993) tests which differentiate the effect of good and bad news on the predictability of future short rate volatility. Our results show that the tests exhibit serious size distortions and loss of power in the face of a neglected level effect.

Keywords: Level Effects; Asymmetry; Engle-Ng Tests (search for similar items in EconPapers)
JEL-codes: C12 E44 G12 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2005
New Economics Papers: this item is included in nep-cfn, nep-ecm, nep-ets, nep-fin and nep-mac
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Citations: View citations in EconPapers (2)

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