Empirical Comparisons in Short-Term Interest Rate Models Using Nonparametric Methods
AbstractThis study applies the nonparametric estimation procedure to the diffusion process modeling the dynamics of short-term interest rates. This approach allows us to operate in continuous time, estimating the continuous-time model, despite the use of discrete data. Three methods are proposed. We apply these methods to two important financial data. After selecting an appropriate bandwidth for each dataset, empirical comparisons indicate that the specification of the drift has a considerable impact on the pricing of derivatives through its effect on the diffusion function. In addition, a novel nonparametric test has been proposed for specification of linearity in the drift. Our simulation directs us to reject the null hypothesis of linearity at the 5% significance level for the two financial datasets. Copyright 2006, Oxford University Press.
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Bibliographic InfoArticle provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.
Volume (Year): 4 (2006)
Issue (Month): 2 ()
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Other versions of this item:
- Arapis, Manuel & Gao, Jiti, 2004. "Empirical comparisons in short-term interest rate models using nonparametric methods," MPRA Paper 11974, University Library of Munich, Germany, revised 23 Dec 2005.
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
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