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: 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
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