THE PERSISTANCE IN VOLATILITY OF THE US TERM PREMIUM 1970-1986

Paper number: 94/09

Paper date: November 1994

Year: 1994

Paper Category: Discussion Paper

Authors

Elias Tzavalis
University of Exeter

M.R.Wickens
Department of Economics, University of York, U.K.

Abstract

This paper examines the persistence of the volatility of the risk premia for excess holding period returns of the term structure using a GARCH-M model of the conditional variance. The finding of a high degree of persistance cannot be sustained once allowance is made for a structural break in the unconditional variance caused by a change in the operation of US monetary policy during 1979-1982.

First Version August 1994
Revised Version November 1994

JEL Classification numbers: C52, G12.
Keywords: Term Structure, Conditional Heteroscedasticity, Volatility, GARCH.

Correspondence to: Elias Tzavalis, Department of Economics, University of Exeter, Exeter EX4 4RJ, United Kingdom.
The authors gratefully acknowledge F.Palm, G.D.A.Phillips and Z.Psaradakis and the anonymous referee of this journal for very helpful comments on an earlier version of this paper. Financial support provided for this research by the ESRC (grant no. R00023296) is also acknowleged.