Modeling the U.S. Short-Term Interest Rate by Mixture Autoregressive Processes
AbstractA new kind of mixture autoregressive model with GARCH errors is introduced and applied to the U.S. short-term interest rate. According to the diagnostic tests developed in the article and further informal checks, the model is capable of capturing both of the typical characteristics of the short-term interest rate: volatility persistence and the dependence of volatility on the level of the interest rate. The model also allows for regime switches whose presence has been a third central result emerging from the recent empirical literature on the U.S. short-term interest rate. Realizations generated from the estimated model seem stable and their properties resemble those of the observed series closely. The drift and diffusion functions implied by the new model are in accordance with the results in much of the literature on continuous-time diffusion models for the short-term interest rate, and the term structure implications agree with historically observed patterns. , .
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Bibliographic InfoArticle provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.
Volume (Year): 1 (2003)
Issue (Month): 1 ()
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- Markku Lanne & Pentti Saikkonen, 2001. "Modeling the U.S. Short-Term Interest Rate by Mixture Autoregressive Processes," CeNDEF Workshop Papers, January 2001, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance PO5, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
- Lanne, Markku & Saikkonen, Pentti, 2000. "Modeling the US short-term interest rate by mixture autoregressive processes," SFB 373 Discussion Papers, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes 2000,76, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
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