The Dynamics of the Australian Short-Term Interest Rate

32 Pages Posted: 16 Aug 1998

See all articles by Tim Brailsford

Tim Brailsford

Bond University

Krishnan Maheswaran

University of Melbourne - Department of Finance

Date Written: March 1998

Abstract

This paper examines various models of the short-term interest rate in Australia. The analysis centres on three classes of models employing a comprehensive data set. First, the generalised diffusion model of Chan et al (1992) is examined which allows the variance to be a function of interest rate levels. This model nests a number of the early term structure models. We find initial support for the generalised model. Second, we examine models which incorporate time-varying volatility dynamics. Third, a class of models which incorporate both time-varying volatility and the levels model is analysed. We extend this model by allowing for an additional asymmetric reaction to news resulting in a threshold-type model. The paper examines each of the models and then proposes and performs prediction tests which allow different classes of model to be benchmarked. The second and third class of models appear to produce the most accurate estimates. The results indicate a number of important differences between the Australian market and overseas markets. We also find the results to be generally robust to various refinements in method.

JEL Classification: G10, G12, G15

Suggested Citation

Brailsford, Timothy John and Maheswaran, Krishnan, The Dynamics of the Australian Short-Term Interest Rate (March 1998). Available at SSRN: https://ssrn.com/abstract=104668 or http://dx.doi.org/10.2139/ssrn.104668

Timothy John Brailsford (Contact Author)

Bond University ( email )

Gold Coast, QLD 4229
Australia

HOME PAGE: http://www.bond.edu.au

Krishnan Maheswaran

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia