Fractionally Integrated Models With ARCH Errors: With an Application to the Swiss 1-Month Euromarket Interest Rate

Fractionally Integrated Models With ARCH Errors: With an Application to the Swiss 1-Month... We introduce ARFIMA-ARCH models, which simultaneously incorporate fractional differencing and conditional heteroskedasticity. We develop the likelihood function and we use it to construct the bias-corrected maximum (modified profile) likelihood estimator. Finite-sample properties of the estimation procedure are explored by Monte Carlo simulation. Backus and Zin (1993) have motivated the existence of fractional integration in interest rates by the persistence of the short rate and the variability of the long end of the yield curve. An empirical investigation of a daily one-month Swiss Euromarket interest rate finds a difference parameter of 0.72. This indicates non-stationary behavior. In contrast to first-order integrated models, the long-run cumulative response of shocks to the series is zero. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Fractionally Integrated Models With ARCH Errors: With an Application to the Swiss 1-Month Euromarket Interest Rate

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 1998 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1008252331292
Publisher site
See Article on Publisher Site

Abstract

We introduce ARFIMA-ARCH models, which simultaneously incorporate fractional differencing and conditional heteroskedasticity. We develop the likelihood function and we use it to construct the bias-corrected maximum (modified profile) likelihood estimator. Finite-sample properties of the estimation procedure are explored by Monte Carlo simulation. Backus and Zin (1993) have motivated the existence of fractional integration in interest rates by the persistence of the short rate and the variability of the long end of the yield curve. An empirical investigation of a daily one-month Swiss Euromarket interest rate finds a difference parameter of 0.72. This indicates non-stationary behavior. In contrast to first-order integrated models, the long-run cumulative response of shocks to the series is zero.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 6, 2004

References

  • Long memory processes and fractional integration in econometrics
    Baillie, R. T.

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