The intertemporal volatility structure of Euro CD rates

In this paper we examine the intertemporal volatility structure of Eurocurrency rates of five different maturities ranging from seven days to twelve months for six Euro CD currency denominations spanning the 1986-1992 period. the analysis used the common ARCH-feature testing methodology recently developed by Engle and Kozicki (1993). First, the results indicate presence of ARCH effects in the Eurocurrency rate series. This result suggests that modelling of Eurocurrency rates requires the inclusion of time-varying risk premia. Second, our evidence reveals that short- and long-term Eurocurrency rate series have the same volatility process. the results point out that a common time-varying volatility process characterises most Eurocurrency rate series across maturities and currency denominations. Hence, the common ARCH results imply that a common time-varying variance model would be the appropriate specification of the conditional heterscedasticity for most Eurocurrency rates. Copyright Blackwell Publishers Ltd. 1995.