Volatility Modelling in the Swedish and US Fixed Income Market : A comparative study of GARCH, ARCH, E-GARCH and GJR-GARCH Models on Government Bonds

Abstract: Volatility is an important variable in financial markets, risk management and making investment decisions. Different volatility models are beneficial tools to use when predicting future volatility. The purpose of this study is to compare the accuracy of various volatility models, including ARCH, GARCH and extensions of the GARCH framework. The study applies these volatility models to the Swedish and American Fixed Income Market for government bonds. The performance of these models is based on out-of-sample forecasting using different loss functions such as RMSE, MAE and MSE, specifically investigating their ability to forecast future volatility. Daily volatility forecasts from daily bid prices from Swedish and American 2, 5- and 10-year governments bonds will be compared against realized volatility which will act as the proxy for volatility. The result show US government bonds, excluding the US 2 YTM, did not show any significant negative volatility, volatility asymmetry or leverage effects. In overall, the ARCH and GARCH models outperformed E-GARCH and GJR-GARCH except the US 2-year YTM showing negative volatility, asymmetry, and leverage effects and the GJR-GARCH model outperforming the ARCH and GARCH models.