A Behavioral Analysis of Interbank Rates in Pakistan
Interbank rate is an important benchmark to gauge the impact of monetary policy on economic activities of a country. Interbank rates serve not only as the basis of financial market operations but also as an effective tool of central bank to control the flow of funds, both in terms of domestic and foreign currencies. Past researchers have used time series methodology to analyse the volatility of interbank rates which, according to present study, has few drawbacks. This study however, attempts to model mean reversion and volatility of interbank rate by applying Vasicek stochastic model using maximum likelihood estimation technique. In order to get sufficient observations, the study applies Monte Carlo simulation in R. The results suggest that the long-term mean and speed of mean reversion behaves in an opposite manner over different time horizons in interbank market of Pakistan.
Copyright (c) 2021 Hammad Hassan Mirza, Mian Sajid Nazir, Ghulam Ali
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