A Comprehensive Analysis of the Short-Term Interest Rate Dynamics
33 Pages Posted: 15 Apr 2005
Date Written: 2005
Abstract
This paper provides a comprehensive analysis of the short-term interest-rate dynamics based on three different data sets and two flexible parametric specifications. The significance of nonlinearity in the short-rate drift declines with increasing maturity for the interest-rate series used in the study. Using a flexible diffusion specification and incorporating GARCH volatility and non-normal innovation reduce the need for a nonlinear drift specification. Finally, the nonlinear drift specification performs better than the linear drift specification only when the short-term interest-rate levels reach historical highs.
Keywords: Short-term interest rates, nonlinearity, drift, diffusion, jumps, GARCH, stochastic volatility
JEL Classification: G12, C13, C22
Suggested Citation: Suggested Citation
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