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Modeling interest rate volatility: A Realized GARCH approach

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  • Tian, Shuairu
  • Hamori, Shigeyuki

Abstract

We propose using a Realized GARCH (RGARCH) model to estimate the daily volatility of the short-term interest rate in the euro–yen market. The model better fits the data and provides more accurate volatility forecasts by extracting additional information from realized measures. In addition, we propose using the ARMA–Realized GARCH (ARMA–RGARCH) model to capture the volatility clustering and the mean reversion effects of interest rate behavior. We find the ARMA–RGARCH model fits the data better than the simple RGARCH model does, but it does not provide superior volatility forecasts.

Suggested Citation

  • Tian, Shuairu & Hamori, Shigeyuki, 2015. "Modeling interest rate volatility: A Realized GARCH approach," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 158-171.
    • Handle: RePEc:eee:jbfina:v:61:y:2015:i:c:p:158-171
    DOI: 10.1016/j.jbankfin.2015.09.008
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    More about this item

    Keywords

    Short-term interest rate; Realized GARCH; High-frequency data; Volatility;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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