Volatility Transmission of Overnight Rate along the Yield Curve in Pakistan

This paper presented the empirical results of the volatility transmission of overnight rate along the yield curve in case of Pakistan. The results indicate that the volatility transmission of overnight repo rate is higher at the shorter end of the yield curve while lower at the longer end. These results are in line with both theoretical and empirical underpinning of the interest rates volatility transmission process found in other countries. Moreover, the results also suggest that the pass-through level of overnight volatility transmission to other market interest rates decreased after State Bank of Pakistan (SBP) adopted the interest rate corridor framework in August 2009. This indicates the enhancement of effective and smooth transmission of SBP policy rate changes to other market interest rates under the current framework. However, absence of any explicit desired level of operational target in the monetary policy framework of SBP still imparts higher volatility in interest rates when compared to other countries following the similar interest rate corridor framework.