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Processes with volatility‐induced stationarity: an application for interest rates
Author(s) -
Nicolau João
Publication year - 2005
Publication title -
statistica neerlandica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.52
H-Index - 39
eISSN - 1467-9574
pISSN - 0039-0402
DOI - 10.1111/j.1467-9574.2005.00292.x
Subject(s) - volatility (finance) , econometrics , forward volatility , logarithm , stochastic volatility , volatility smile , implied volatility , volatility swap , martingale (probability theory) , economics , mathematics , statistics , mathematical analysis
In this paper we propose a refinement of the existing definition of volatility‐induced stationarity that allows us to distinguish between processes with drift and diffusion induced stationarity and processes with pure volatility‐induced stationarity. We also propose a classification of stationary processes with volatility‐induced stationarity according to the volatility that is needed to inject stationarity. Processes with volatility‐induced stationarity are potentially applicable to interest rate time‐series since, as has been acknowledged, mean‐reversion effects occur mainly in periods of high volatility. As such, we provide evidence that the logarithm of the Fed funds rate can be modelled as a local martingale with volatility‐induced stationarity.