Regime-switching stochastic volatility and short-term interest rates (ABSTRACT)
Kalimipalli, M., & Susmel, R.
published: 2004 | Research publication | Refereed Journals - Finance
Kalimipalli, M., & Susmel, R. (2004). "Regime-switching stochastic volatility and short-term interest rates". Journal of Empirical Finance, 11 (3), 309-329. (LEAD PAPER)
ABSTRACT: In this paper, we introduce regime switching in a two-factor stochastic volatility (SV) model to explain the behavior of short-term interest rates. We model the volatility of short-term interest rates as a stochastic volatility process whose mean is subject to shifts in regime. We estimate the regime-switching stochastic volatility (RSV) model using a Gibbs Sampling-based Markov Chain Monte Carlo algorithm. In-sample results strongly favor 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.
Author Keywords: Short-term interest rates; Stochastic volatility; Regime switching; MCMC methods; GARCH models
Download the article at: http://dx.doi.org/10.1016/j.jempfin.2003.10.001
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