Modeling of volatility of interest and treasury bill rates using arch / garch family models and their effect on pension fund

Abstract

The interest rate and Treasury bill rates were converted into simple returns and modeled by use of ARCH and GARCH (1, 1) models. The GARCH (1,1) was preferred because it allows many parameters and considers conditional heteroscedasticity of data to assess volatility of interest rates and Treasury rates. Volatility measures the errors made in modeling returns. It was discovered that the average volatility is not constant but varies with time and can be forecast or predicted in both cases. Also a multifactor model was used to investigate how the two affect pension Fund, it was discovered that interest rates affected pension fund more than the treasury rates, and the model can be used to project growth of the fund.