Time-Varying Volatility and the Dynamic Behavior of the Term Structure

29 Pages Posted: 27 Apr 2000 Last revised: 26 Jul 2010

See all articles by Victor K. Ng

Victor K. Ng

International Monetary Fund (IMF) - Research Department; National Bureau of Economic Research (NBER)

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: April 1991

Abstract

In this paper, we consider a framework with which the cross sectional and time series behavior of the yield curve can be studied simultaneously. We examine the relationship between the yield curve and the time-varying conditional volatility of the Treasury bill market. We demonstrate that differently shaped yield curves can result given different combinations of volatility and expectations about future spot rates. Moreover, adjusting the forward rate for the volatility related liquidity premium can improve its performance as a predictor of future spot rates at least for the period from August 1964 to August 1979.

Suggested Citation

Ng, Victor K. and Engle, Robert F., Time-Varying Volatility and the Dynamic Behavior of the Term Structure (April 1991). NBER Working Paper No. w3682. Available at SSRN: https://ssrn.com/abstract=227443

Victor K. Ng

International Monetary Fund (IMF) - Research Department ( email )

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National Bureau of Economic Research (NBER)

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Robert F. Engle (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

New York University (NYU) - Department of Finance

Stern School of Business
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New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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