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A factor analysis of volatility across the term structure: the Spanish case

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Benito, Sonia and Novales Cinca, Alfonso (2005) A factor analysis of volatility across the term structure: the Spanish case. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 02, 2005, ]

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Official URL: http://eprints.ucm.es/7872/


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Abstract

We show how the term structure of volatilities for zero-cupon interest rates from the Spanish secondary debt market can be explained by a reduced number of factors. This factor representation can be used to produce time series volatilities across the whole term structure. As an alternative, volatilities can also be derived from a factor model for interest rates themselves. We find evidence contrary to the hypothesis that these two procedures lead to statistically equivalent time series, so that choosing the right model to estimate volatility is far from trivial. The volatility factor model fits univariate EGARCH volatility time series much better than the interest rate factor model does. However, observed differences seem to be of little
consequence for VaR estimation on zero coupon bonds.


Item Type:Working Paper or Technical Report
Uncontrolled Keywords:analysis of volatility
Subjects:Social sciences > Economics > Econometrics
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2005
Number:02
ID Code:7872
Deposited On:28 Apr 2008
Last Modified:04 Dec 2017 09:56

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