Journal of Banking & Finance Vol. 33 No. 2 2009
Regime switching in the relationship between equity returns and short-term interest rates in the UK
Abstract
This paper examines the relationship between UK equity returns and short-term interest rates using a two regime Markov-Switching EGARCH model. The results suggest one high-return, low variance regime within which the conditional variance of equity returns responds persistently but symmetrically to equity return innovations. In the other, low-mean, high variance, regime equity volatility responds asymmetrically and without persistence to shocks to equity returns. There is evidence of a regime dependent relationship between shorter maturity interest rate differentials and equity return volatility. Furthermore, there is evidence that events in the money markets influence the probability of transition across regimes.
- DOI
- 10.1016/j.jbankfin.2008.08.001
- Volume
- 33
- Issue
- 2
- Pages
- 405-414
- Language
- en
- Sources
- crossref openalex bibtex:phds-export.bib