Revisiting the Shape of the Yield Curve: The Effect of Interest Rate Volatility

30 Pages Posted: 21 Mar 2001

See all articles by Charlotte Christiansen

Charlotte Christiansen

Aarhus University - CREATES

Jesper Lund

Copenhagen Business School - Department of Finance

Date Written: June 8, 2005

Abstract

This paper examines the relationship between interest-rate volatility and the shape of the yield curve. The yield curve is parsimoniously described by its level,slope,and curvature. The level,the slope and the curvature are analyzed within a trivariate heteroskedastic model, where the conditional short-rate volatility is included in the mean specification. The slope and the curvature depend positively and significantly on the short-rate volatility. The effect of the interest rate volatility is more pronounced for the curvature than for the slope. Differences between subperiods are explored, as are differences across the maturity spectrum.

Keywords: Multivariate GARCH-M,Short-Rate Volatility,Yield Curve Curvature,Yield Curve Shape, Yield Curve Slope

Suggested Citation

Christiansen, Charlotte and Lund, Jesper, Revisiting the Shape of the Yield Curve: The Effect of Interest Rate Volatility (June 8, 2005). Available at SSRN: https://ssrn.com/abstract=264139 or http://dx.doi.org/10.2139/ssrn.264139

Charlotte Christiansen (Contact Author)

Aarhus University - CREATES ( email )

Fuglesangs Alle 4
Aarhus V, DK 8210
Denmark

Jesper Lund

Copenhagen Business School - Department of Finance ( email )

Department of Finance
Denmark

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