Nonlinear Drift and Stochastic Volatility: An Empirical Investigation of Short-Term Interest Rate Models

Posted: 12 Oct 2002

Abstract

In this article I provide new evidence on the role of nonlinear drift and stochastic volatility in interest rate modeling. I compare various model specifications for the short-term interest rate using the data from five countries. I find that modeling the stochastic volatility in the short rate is far more important than specifying the shape of the drift function. The empirical support for nonlinear drift is weak with or without the stochastic volatility factor. Although a linear drift stochastic volatility model fits the international data well, I find that the level effect differs across countries.

JEL Classification: C52, E43, G12

Suggested Citation

Sun, Licheng, Nonlinear Drift and Stochastic Volatility: An Empirical Investigation of Short-Term Interest Rate Models. Available at SSRN: https://ssrn.com/abstract=328603

Licheng Sun (Contact Author)

Old Dominion University ( email )

Strome College of Business
Department of Finance
Norfolk, VA 23529-0222
United States

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