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Itô Conditional Moment Generator and the Estimation of Short-Rate Processes

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Author Info
Hao Zhou

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Abstract

This article exploits the Itô's formula to derive the conditional moments vector for the class of interest rate models that allow for nonlinear volatility and flexible jump specifications. Such a characterization of continuous-time processes by the Itô conditional moment generator noticeably enlarges the admissible set beyond the affine jump-diffusion class. A simple generalized method of moments (GMM) estimator can be constructed based on the analytical solution to the lower-order moments, with natural diagnostics of the conditional mean, variance, skewness, and kurtosis. Monte Carlo evidence suggests that the proposed estimator has desirable finite sample properties relative to the asymptotically efficient maximum- likelihood estimator (MLE). The empirical application singles out the nonlinear quadratic variance as the key feature of the U.S. short-rate dynamics. , .

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Publisher Info
Article provided by Oxford University Press in its journal Journal of Financial Econometrics.

Volume (Year): 1 (2003)
Issue (Month): 2 ()
Pages: 250-271
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Handle: RePEc:oup:jfinec:v:1:y:2003:i:2:p:250-271

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  5. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
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  10. Torben G. Andersen & Tim Bollerslev & Peter F. Christoffersen & Francis X. Diebold, 2005. "Volatility Forecasting," PIER Working Paper Archive 05-011, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
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  11. Hansen, Lars Peter & Alexandre Scheinkman, Jose & Touzi, Nizar, 1998. "Spectral methods for identifying scalar diffusions," Journal of Econometrics, Elsevier, vol. 86(1), pages 1-32, June. [Downloadable!] (restricted)
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  14. Marsh, Terry A & Rosenfeld, Eric R, 1983. " Stochastic Processes for Interest Rates and Equilibrium Bond Prices," Journal of Finance, American Finance Association, vol. 38(2), pages 635-46, May. [Downloadable!] (restricted)
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  19. Bollerslev, Tim & Zhou, Hao, 2002. "Estimating stochastic volatility diffusion using conditional moments of integrated volatility," Journal of Econometrics, Elsevier, vol. 109(1), pages 33-65, July. [Downloadable!] (restricted)
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  21. repec:cup:etheor:v:13:y:1997:i:5:p:615-45 is not listed on IDEAS
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  23. Monika Piazzesi, 2001. "An Econometric Model of the Yield Curve with Macroeconomic Jump Effects," NBER Working Papers 8246, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  24. Singleton, Kenneth J., 2001. "Estimation of affine asset pricing models using the empirical characteristic function," Journal of Econometrics, Elsevier, vol. 102(1), pages 111-141, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michael Sørensen & Julie Lyng Forman, 2007. "The Pearson diffusions: A class of statistically tractable diffusion processes," CREATES Research Papers 2007-28, School of Economics and Management, University of Aarhus. [Downloadable!]
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