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Estimating One-Factor Models of Short-Term Interest Rates

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Author Info
Mc Manus, Des
Watt, David
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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File URL: http://www.bankofcanada.ca/en/res/wp/1999/wp99-18.pdf
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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
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Handle: RePEc:bca:bocawp:99-18

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Related research
Keywords: Financial markets; Interest rates;

Find related papers by JEL classification:
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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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  6. Tauchen, George E., 1995. "New Minimum Chi-Square Methods in Empirical Finance," Working Papers 95-42, Duke University, Department of Economics.
  7. Gallant, A. Ronald & Tauchen, George, 1996. "Which Moments to Match?," Econometric Theory, Cambridge University Press, vol. 12(04), pages 657-681, October. [Downloadable!]
  8. Ogaki, M., 1992. "An Introduction to the Generalized Method of Moments," RCER Working Papers 314, University of Rochester - Center for Economic Research (RCER).
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  10. repec:wop:imespe:9708 is not listed on IDEAS
  11. Nowman, K B, 1997. " Gaussian Estimation of Single-Factor Continuous Time Models of the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 52(4), pages 1695-1706, September. [Downloadable!] (restricted)
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  13. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1980. " An Analysis of Variable Rate Loan Contracts," Journal of Finance, American Finance Association, vol. 35(2), pages 389-403, May. [Downloadable!] (restricted)
  14. Tse, Y. K., 1995. "Some international evidence on the stochastic behavior of interest rates," Journal of International Money and Finance, Elsevier, vol. 14(5), pages 721-738, October. [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. Diether Beuermann & Antonios Antoniou & Alejandro Bernales, 2005. "The Dynamics of the Short-Term Interest Rate in the UK," Finance 0512029, EconWPA. [Downloadable!]
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