The short interest rate in Turkey: A regime switching model.
Item
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Title
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The short interest rate in Turkey: A regime switching model.
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Identifier
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AAI3074660
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identifier
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3074660
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Creator
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Laiho, Heikki Aarre Olavi.
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Contributor
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Adviser: Salih N. Neftci
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Date
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2003
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Language
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English
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Publisher
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City University of New York.
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Subject
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Economics, Finance
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Abstract
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This study examines the behavior of the overnight interbank interest rate in Turkey. First, Principal Component Analysis is conducted on the Turkish bond indices. The results indicate that a traditional one-factor model is not sufficient for describing the dynamics of the yield curve. Next, the time series of the overnight interbank interest rate and its difference are examined, and found to be non-normal, but stationary. The interest rate exhibits mean reversion and volatility clustering, and the Bai-Perron model finds structural breaks in its time series. These characteristics are consistent with a regime switching process. A Markov switching Vasicek model is used to estimate the dynamics of the short rate. Four regimes are found, representing a constant interest rate, random walk, mean reversion, and unusually high and very volatile interest rate. Volatility is inversely related to the level of the interest rate. The estimations also show that modeling volatility correctly is more important than modeling the other parameters. Overall, the regime switching model is an improvement over the traditional Vasicek model.
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Type
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dissertation
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Source
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PQT Legacy CUNY.xlsx
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degree
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Ph.D.
