economics letters ELSEVIER Economics Letters 56 (1997) 325-332 How sensitive is short-term Japanese interest rate volatility to the level of the interest rate? Takato Hiraki a'*, Nobuya Takezawa b aGraduate School of International Management, International University of Japan, Yamato-machi, Niigata 949- 72, Japan b Graduate School of International Management, International University of Japan, Yamato-machi, Niigata 949-72, Japan Received 5 December 1996; accepted 10 March 1997 Abstract The sensitivity of volatility to the level of the interest rate is well documented in the literature. We investigate whether such results are robust over a range of maturities ranging from seven days to twelve months and whether these findings hold for offshore Japanese yen rates. The volatility is sensitive to level of the rate itself for every maturity examined. © 1997 Elsevier Science S.A. Keywords: Japanese interest rates; Volatility; Term structure JEL classification: E43 1. Introduction Of particular interest is the degree to which the volatility of the short term interest rate is sensitive to the level of the short term rate itself. Chan, Karyoli, Longstaff, and Sanders (Chan et al., 1992a,b) documented that the most important factor in characterizing the behavior of the US T-bill and Japanese gensaki rate is the sensitivity of the volatility to the level of the rate itself. The extent, however, to which these results characterize interest rate volatility across a wider spectrum of short-term maturities has been left relatively unexplored. The notion of short-term is sometimes not clearly defined in an operational context. "Short-term" is a relative concept. Most empirical work, however, focus on a single rate with a maturity between one to three months. Yet, we could have short-term rates which are less than one month in maturity as well as rates which are longer than three months in maturity. Thus it is important to be able to characterize the behavior of interest rates over a range of short-term maturities. This paper examines various models using offshore Japanese short- term rates with maturities ranging from seven days to twelve months. In using short-term offshore *Corresponding author. Tel.: +81 257 791516; fax: +81 257 794443. 0165-1765/97/$17.00 © 1997 Elsevier Science S.A. All rights reserved. Pll S0165- 1765(97)00133-X