Multivariate Term Structure Models with Level and Heteroskedasticity Effects

29 Pages Posted: 22 Oct 2002

Date Written: October 2002

Abstract

The paper introduces and estimates a multivariate level-GARCH model for the long rate and the term structure spread where the conditional volatility is proportional to the gamma'th power of the variable itself (level effects) and the conditional covariance matrix evolves according to a multivariate GARCH process (heteroskedasticity effects). The conditional long rate variance exhibits heteroskedasticity effects and level effects in accordance with the square-root model. The conditional spread variance exhibits heteroskedasticity effects but no level effects. The level-GARCH model is preferred above the GARCH model and the level model. GARCH effects are more important than level effects.

Keywords: Heteroskedasticity effects, Level effects, Multivariate level-GARCH model, Two-factor term structure model

JEL Classification: C32, E43, G12

Suggested Citation

Christiansen, Charlotte, Multivariate Term Structure Models with Level and Heteroskedasticity Effects (October 2002). Available at SSRN: https://ssrn.com/abstract=338400 or http://dx.doi.org/10.2139/ssrn.338400

Charlotte Christiansen (Contact Author)

Aarhus University - CREATES ( email )

Fuglesangs Alle 4
Aarhus V, DK 8210
Denmark

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