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Nonlinear Drift And Stochastic Volatility: An Empirical Investigation Of Short-Term Interest Rate Models

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  • Licheng Sun
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    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. 2003 The Southern Finance Association and the Southwestern Finance Association.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/1475-6803.00065
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    Bibliographic Info

    Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

    Volume (Year): 26 (2003)
    Issue (Month): 3 ()
    Pages: 389-404

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    Handle: RePEc:bla:jfnres:v:26:y:2003:i:3:p:389-404

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0270-2592
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    Web page: http://www.southwesternfinance.org/
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    Cited by:
    1. Ram Bhar & Carl Chiarella & Hing Hung & Wolfgang Runggaldier, 2004. "The Volatility of the Instantaneous Spot Interest Rate Implied by Arbitrage Pricing - A Dynamic Bayesian Approach," Finance 0409002, EconWPA.

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