Modeling volatility changes in the 10-year Treasury

Guillermo Covarrubias, Bradley T. Ewing, Scott E. Hein, Mark Andrew Thompson

Research output: Contribution to journalArticle

12 Citations (Scopus)

Abstract

This paper examines the daily volatility of changes in the 10-year Treasury note utilizing the iterated cumulative sums of squares algorithm [C. Inclan, G. Tiao, Use of cumulative sums of squares for retrospective detection of changes of variance, J. Am. Stat. Assoc. 89 (1994) 913-923]. The ICSS algorithm can detect regime shifts in the volatility of the interest rate changes. A general model allows for endogenously determined changes in variance while the more restrictive model forces the variance to follow the same process throughout the sample period. A comparison of the out-of-sample volatility forecasting performance of two competing models is made using asymmetric error measures. The asymmetric error statistics penalize models for under- or over-predicting volatility. The results shed light on the importance of ignoring volatility regime shifts when performing out-of-sample forecasts. The findings are important to financial market participants who require accurate forecasts of future volatility in order to implement and evaluate asset performance.

Original languageEnglish (US)
Pages (from-to)737-744
Number of pages8
JournalPhysica A: Statistical Mechanics and its Applications
Volume369
Issue number2
DOIs
StatePublished - Sep 15 2006

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Volatility
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Keywords

  • Asymmetric forecast evaluation
  • Forecasting
  • Interest rate
  • Regime shifts
  • Volatility

ASJC Scopus subject areas

  • Statistics and Probability
  • Condensed Matter Physics

Cite this

Modeling volatility changes in the 10-year Treasury. / Covarrubias, Guillermo; Ewing, Bradley T.; Hein, Scott E.; Thompson, Mark Andrew.

In: Physica A: Statistical Mechanics and its Applications, Vol. 369, No. 2, 15.09.2006, p. 737-744.

Research output: Contribution to journalArticle

Covarrubias, Guillermo ; Ewing, Bradley T. ; Hein, Scott E. ; Thompson, Mark Andrew. / Modeling volatility changes in the 10-year Treasury. In: Physica A: Statistical Mechanics and its Applications. 2006 ; Vol. 369, No. 2. pp. 737-744.
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