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Estimating One-Factor Models of Short-Term Interest Rates

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  • Mc Manus, Des
  • Watt, David
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    Abstract

    There currently exists in the literature several continuous-time one-factor models for short-term interest rates. This paper considers a wide range of these models that are nested into one general model. These models are approximated using both a discrete-time model and a model that accounts for aggregation effects over time, and are estimated by both the method of maximum likelihood and the general method of moments, for both Canadian and U.S. data. The estimation results are found to be independent of the approximation model used. However, the results are dependent on the estimation technique, more so for Canada than the United States. As an alternative check, the efficient method of moments is also employed. Hypothesis testing strongly suggests these one-factor models do not provide a good description of the evolution of Canadian short-term interest rates. In contrast, these models perform better for short-term U.S. interest rates.

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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 99-18.

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    Length: 45 pages
    Date of creation: 1999
    Date of revision:
    Handle: RePEc:bca:bocawp:99-18

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    Related research

    Keywords: Financial markets; Interest rates;

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    References

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    Cited by:
    1. Peter Aling & Shakill Hassan, 2011. "No-Arbitrage One-Factor Models of the South African Term-Structure of Interest Rates," Working Papers 246, Economic Research Southern Africa.
    2. Diether Beuermann & Antonios Antoniou & Alejandro Bernales, 2005. "The Dynamics of the Short-Term Interest Rate in the UK," Finance, EconWPA 0512029, EconWPA.

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