Tests of the Federal Funds Rate : A Classic Application of Garch-M

We analyze Fed funds rate changes in GARCH-in-mean (GARCH-M) models and find: (a) daily rate change and variance patterns differ with the timing of the rate observation, but that all patterns are generally consistent with optimal reserve account management; (b) Fed funds daily and intraday variances exhibit trends and persistence; (c) daily variance effects differ when using marginal rates versus daily weighted average rates; and (d) conditional variances do not provide information about daily or intraday rate changes. In addition, our results provide support for the use of GARCH models for studies on other financial assets