The Dynamics of Short-term Interest Rates: An Econometric Analysis
AbstractSingle factor models of term structure have been extensively employed for valuation of interest rate contingent claims. There are a large number of short rate models, some of which are special case of others. In this paper, we have estimated five different models of the dynamics of the short rate using alternative data sets on MIBOR and T-bill yields. We use two of the estimated models to construct zero coupon yield curves for a particular day and compare it with the yield curve extracted from bond price data using a curve fitting procedure. We also compare option prices implied by the two models. We find that the term structures implied by the estimated models differ significantly from the yield curve estimated by curve fitting procedures. Also, the two models yield significantly different values for a particular option on a zero coupon bond.
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Bibliographic InfoArticle provided by Department of Economics, Delhi School of Economics in its journal Indian Economic Review.
Volume (Year): 36 (2001)
Issue (Month): 2 (July)
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Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
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