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Mean Reversion in US and International Short Rates

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Author Info
Charlotte Christiansen () (School of Economics and Management, University of Aarhus, Denmark and CREATES)

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Abstract

In this paper we extend the CKLS one factor short rate model to include extreme value nonlinear mean reversion. Similarly to a recent stock market study, we include the smallest short rate during the previous year in the mean equation. We investigate the US and five other major markets (Canada, Germany, Japan, Switzerland, and the UK). There is extreme value mean reversion in the US short rate. For Japan there is both linear and nonlinear mean reversion. For the remaining short rates there is no evidence of mean reversion.

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Publisher Info
Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2008-47.

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Length: 27
Date of creation: 02 Sep 2008
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Handle: RePEc:aah:create:2008-47

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Web page: http://www.econ.au.dk/afn/

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Related research
Keywords: Short term interest rate; Mean reversion; Extreme value; Nonlinearity;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation

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  1. Bali, Turan G. & Demirtas, K. Ozgur & Levy, Haim, 2008. "Nonlinear mean reversion in stock prices," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 767-782, May. [Downloadable!] (restricted)
  2. Chan, K C, et al, 1992. " An Empirical Comparison of Alternative Models of the Short-Term Interest Rate," Journal of Finance, American Finance Association, vol. 47(3), pages 1209-27, July. [Downloadable!] (restricted)
  3. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, 02. [Downloadable!] (restricted)
  4. Bali, Turan G. & Wu, Liuren, 2006. "A comprehensive analysis of the short-term interest-rate dynamics," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1269-1290, April. [Downloadable!] (restricted)
  5. David A. Chapman & Neil D. Pearson, 1998. "Is the Short Rate Drift Actually Nonlinear?," Finance 9808005, EconWPA. [Downloadable!]
  6. Faff, Robert & Gray, Philip, 2006. "On the estimation and comparison of short-rate models using the generalised method of moments," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 3131-3146, November. [Downloadable!] (restricted)
  7. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March. [Downloadable!] (restricted)
  8. Manuel Arapis & Jiti Gao, 2006. "Empirical Comparisons in Short-Term Interest Rate Models Using Nonparametric Methods," Journal of Financial Econometrics, Oxford University Press, vol. 4(2), pages 310-345. [Downloadable!] (restricted)
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  9. Brennan, Michael J. & Schwartz, Eduardo S., 1980. "Analyzing Convertible Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(04), pages 907-929, November. [Downloadable!]
  10. Hideyuki Takamizawa, 2008. "Is Nonlinear Drift Implied by the Short End of the Term Structure?," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 21(1), pages 311-346, January. [Downloadable!] (restricted)
    Other versions:
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