Modelling short term interest rate volatility with time series model a case of pakistani financial markets

Abstract

This study investigates the volatility of short term interest rate (6 month T-bills) using GARCH and E-GARCH models while taking the case of Pakistani financial market. Monthly data of T-bills covering the period January 2005 to December 2012 is used for measuring the volatility of short term interest rate. The sample used GARCH and E-GARCH models for analysis. The empirical results from both the models show that the GARCH model can better predict the volatility behaviour of short term interest rate as compared to E-GARCH model in Pakistani market. Analysis of data shows that short term interest rates show volatility clustering effect and that is shown in the GARCH and E-GARCH model.