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Likelihood-based estimation of a semiparametric time-dependent jump diffusion model of the short-term interest rate

Author

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  • Tianshun Yan

    (Chongqing Technology and Business University
    Xi’an Jiaotong University)

  • Yanyong Zhao

    (Nanjing Audit University)

  • Wentao Wang

    (Xi’an Jiaotong University)

Abstract

This paper proposes a semiparametric time-dependent jump diffusion model in an effort to capture the dynamic behavior of short-term interest rates. The newly proposed model includes a wide variety of well-known interest rate models, incorporating the time-varying instantaneous return, volatility as well as jump component. The local likelihood density estimation technique together with pseudo likelihood estimation method is employed to estimate the parameters of the model. Some simulations are conducted to examine the statistical performance of our estimators. The proposed procedure is then applied to analyze daily federal funds rate.

Suggested Citation

  • Tianshun Yan & Yanyong Zhao & Wentao Wang, 2020. "Likelihood-based estimation of a semiparametric time-dependent jump diffusion model of the short-term interest rate," Computational Statistics, Springer, vol. 35(2), pages 539-557, June.
    • Handle: RePEc:spr:compst:v:35:y:2020:i:2:d:10.1007_s00180-019-00875-1
    DOI: 10.1007/s00180-019-00875-1
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    References listed on IDEAS

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