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The Journal of Fixed Income

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Primary Article

Modeling Short-Term Interest Rate Volatility

Information Shocks versus Interest Rate Levels

Gregory Koutmos
The Journal of Fixed Income Spring 2000, 9 (4) 19-26; DOI: https://doi.org/10.3905/jfi.2000.319250
Gregory Koutmos
Professor of finance at Fairfield University's School of Business in Fairfield, Connecticut.
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Abstract

This article investigates the impact of information shocks and interest rate levels on the volatility of six national short-term interest rates. Short-term rates are assumed to follow a single-factor diffusion process that tests several popular models that have been used in literature. The elasticity of variance with respect to the level of interest rates is not as important as reported by some researchers. In fact, models using only information shocks perform better than models using only levels. In all cases, however, the best volatility specification requires the use of both information shocks and interest rate levels. Mean reversion does not appear to be an important feature of short-term interest rates.

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The Journal of Fixed Income
Vol. 9, Issue 4
Spring 2000
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Modeling Short-Term Interest Rate Volatility
Gregory Koutmos
The Journal of Fixed Income Mar 2000, 9 (4) 19-26; DOI: 10.3905/jfi.2000.319250

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Modeling Short-Term Interest Rate Volatility
Gregory Koutmos
The Journal of Fixed Income Mar 2000, 9 (4) 19-26; DOI: 10.3905/jfi.2000.319250
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