A Comprehensive Analysis of the Short-Term Interest Rate Dynamics

33 Pages Posted: 15 Apr 2005

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - McDonough School of Business

Liuren Wu

City University of New York, CUNY Baruch College - Zicklin School of Business

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

Bali, Turan G. and Wu, Liuren, A Comprehensive Analysis of the Short-Term Interest Rate Dynamics (2005). Available at SSRN: https://ssrn.com/abstract=688581 or http://dx.doi.org/10.2139/ssrn.688581

Turan G. Bali

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

Liuren Wu (Contact Author)

City University of New York, CUNY Baruch College - Zicklin School of Business ( email )

One Bernard Baruch Way
Box B10-247
New York, NY 10010
United States
646-312-3509 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://faculty.baruch.cuny.edu/lwu/

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
653
Abstract Views
2,332
Rank
74,502
PlumX Metrics