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| Wilfling, Bernd. |
| The volatility of interest rates is relevant for many financial applications. Under realistic assumptions the term structure of interest rate differentials provides an important prediction of the term structure of interest rates. This paper derives the term structure of differentials in a situation in which two open economies plan to enter a monetary union in the future. Two systems of floating exchange rates prior to the union are considered, namely a free-float and a managed-float regime. The volatility processes of arbitrary term differentials under the respective pre-switch arrangements are compared. The paper elaborates the singularity of extremely short-term (i.e. instantaneous) interest rates under extensive leaning-against-the-wind intervention... |
| Tipo: Working or Discussion Paper |
Palavras-chave: Interest rate volatility; Term structure; Exchange rate arrangements; Intervention policy; Stochastic processes; Financial Economics; E43; F31; F33; C52. |
| Ano: 2001 |
URL: http://purl.umn.edu/26277 |
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| Wilfling, Bernd. |
| Recent theory on exchange rate dynamics suggests that the mere announcement of regime switching from floating to fixed rates at a given future date triggers a reduction in exchange rate volatility during the interim period. Using a Markov-switching GARCH model this paper estimates the volatility processes of four EMU exchange rate returns vis-à-vis the German mark using daily data for the time prior to Stage III of EMU. Statistical inference yields the dates at which financial markets began to incorporate the expected EMU participation of each country into currency pricing. The data exhibits strong econometric evidence for two distinct views concerning the ultimate EMU membership: (1) Finland and France were considered irrefutable EMU members long before... |
| Tipo: Working or Discussion Paper |
Palavras-chave: EMU; Exchange rate policy; Volatility; Regime-switching GARCH models; Financial Economics; F31; F33; C51. |
| Ano: 2001 |
URL: http://purl.umn.edu/26136 |
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| Wilfling, Bernd. |
| The process of international interest rate convergence for arbitrary terms (represented by the term structure of interest rate differentials) is derived in a model of a small open economy which faces a purely time-contingent exchange rate regime switch from flexible to fixed rates. Special attention is paid to a situation in which financial markets deem a delay in the regime switch beyond the publicly announced fixing date possible. The closed-form solution of the term structure allows us to analyze the volatility of interest rate differentials thus providing a useful tool for interest-rate-sensitive security valuation and other risk management applications. Furthermore, the model demonstrates that the economy under consideration has to pay for the... |
| Tipo: Working or Discussion Paper |
Palavras-chave: Exchange rate regime switches; Interest rates; Term structure; Stochastic processes; Uncertainty; Financial Economics; E43; F31; F33. |
| Ano: 2001 |
URL: http://purl.umn.edu/26165 |
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