Abstract
Interest rate functions as the cornerstone for the heavy majority of the financial models. The high volatility in interest rates in the financial crisis of 2008/09 and resulting increased uncertainty led many researchers to focus on modeling the dynamics of changes in short term interest rates. This study aims to analyze the volatility of short-term interest rate in Turkey in terms of overnight repo rate and to forecast this rate for the next six months by modelling this volatility. For this purpose, the ARCH family models like ARCH, GARCH and EGARCH were preferred to use since they are the most common methods in the literature. Using the weekly frequency data for the period of January 2002 - January 2021, the model that best describes the stochastic volatility in the data was found to be the GARCH (1.1) model. As a result of the fact that the in-sample estimates were found sufficient, the interest rate estimates for the next 6 months were realized.
Highlights
In 2008 global economic turmoil, interest rates have shown substantial fluctuations in terms of both in their levels and volatility
This study aims to analyze the volatility of short-term interest rate in Turkey in terms of overnight repo rate and to forecast this rate for the six months by modelling this volatility
In order to increase the return of their portfolio, 2021, Vol 11, No 1 fixed-income portfolio managers had to spend most of their time to solve the problems that were caused by the sort-term interest rate volatility
Summary
In 2008 global economic turmoil, interest rates have shown substantial fluctuations in terms of both in their levels and volatility. In order to increase the return of their portfolio, 2021, Vol 11, No 1 fixed-income portfolio managers had to spend most of their time to solve the problems that were caused by the sort-term interest rate volatility. This process has shown that investors should be more informed in order to reduce the interest rate risk in bond portfolios. The importance of interest rate volatility in financial market analysis is better understood by investors (Brousseau & Durre, 2013). Since monetary policy is carried out by using short-term interest rates that determine long-term interest rates, it is extremely important for central banks to examine short-term interest rate variability (Brousseau & Durre, 2013)
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