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| Author: | Kalimipalli, M. Susmel, R. |
| Title: | Regime-switching stochastic volatility and short-term interest rates |
| Journal: | Journal of Empirical Finance
2004 : JUN, VOL. 11:3, p. 309-329 |
| Index terms: | Financial markets Interest rates Volatility Models |
| Language: | eng |
| Abstract: | This paper introduces regime switching in a 2-factor stochastic volatility (SV) model to explain the behaviour of short-term interest rates. The volatility (hereafter as: vol.) of short-term interest rates as a SV process whose mean is subject to shifts in regime. The regime-switching SV (or RSV) model is estimated using a Gibbs Sampling-based Markov Chain Monte Carlo algorithm. In-sample results strongly favour the RSV model in comparison to the single-state SV model and Generalized Autoregressive Conditional Heteroscedasticity (GARCH) family of models. Out-of-sample results are mixed and, overall, provide weak support for the RSV model. |
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