The impact of inflation rate announcements on interest rate volatility: Australian evidence

Australian interest rate volatility is modelled to examine the effect of quarterly inflation rate announcements on interest rate volatility. The data used in this empirical analysis consists of the daily closing rates for 90 day Australian treasury bills from 3 July 1985 to 31 December 1993. Using model selection and various diagnostic procedures, an integrated EGARCH— M model is found to be the appropriate process to explain the time—varying volatility of interest rates. The results in this study suggest there is a significant news effect on interest rate volatility, apparently due to the unanticipated component of the inflation rate announcement. Evidence is provided in support of the efficient markets hypothesis.