VOLUME V
SPRING 1997

EXPECTATIONS AND CONDITIONED VOLATILITY: INTEREST RATES IN THE INTER-BANK MARKET
 
JORGE V. PÉREZ RODRÍGUEZ
Universidad de Las Palmas
MARC SÁEZ
Universidad de Girona
CARLOS MURILLO
Universidad Pompeu Fabra
 
In this paper we examine whether the rational expectations/constant liquidity premium theory can explain the time structure of short-term interest rates in the Spanish interbank market for monthly data from 1977 to 1995. To that end, we use the Campbell and Shiller (1987) test, based on a cointegrated VAR-model. This model allows us to obtain consistent estimates and study the size and persistence of shocks using impulse response functions in order to estimate effcient parameters by modelling conditional variance over time. In this sense, we propose some types of multiequational GARCH models based on the VAR-model. We find that the empirical evidence does not sup-port the rational expectations/constant liquidity premium theory, that there is a joint dynamic for short-term interest rates which is defined by VAR(4)-GARCH(1,1)-BEKK (close to integrability), and that there are other risk fac-tors wich affect the liquidity premiums.
 
Keywords: interest rates, VAR, multiequational GARCH.

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