The Stochastic Volatility of Short-Term Interest Rates: Some International Evidence

Authors


  • Ball is from Vanderbilt University, and Torous is from the University of California, Los Angeles. Ball thanks the Dean's fund and the Financial Markets Research Center at the Owen School of Management, Vanderbilt University, for financial support. We thank Peter Bossaerts, Francis Longstaff, Ron Masulis, René Stulz, and two anonymous referees for their helpful comments and suggestions. We alone are responsible for any remaining errors.

ABSTRACT

This paper estimates a stochastic volatility model of short-term riskless interest rate dynamics. Estimated interest rate dynamics are broadly similar across a number of countries and reliable evidence of stochastic volatility is found throughout. In contrast to stock returns, interest rate volatility exhibits faster mean-reverting behavior and innovations in interest rate volatility are negligibly correlated with innovations in interest rates. The less persistent behavior of interest rate volatility reflects the fact that interest rate dynamics are impacted by transient economic shocks such as central bank announcements and other macroeconomic news.

Ancillary