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Bayesian non-linear modellings of the short term US interest rate: the help of non-parametric tools

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LUBRANO, Michel

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Abstract

This paper is concerned with the empirical investigation of models of the US short term interest rate, using a mixture of classical non-parametric methods and of Bayesian parametric methods. The shape of the drift and volatility functions of the usual diffusion equation are first investigated using a preliminary non-parametric analysis. The paper then develops a Bayesian method for comparing models which is based on the ability of a model to minimise the Hellinger distance between the posterior predictive density and the density of the observed sample. A discretisation of the usual diffusion equation is estimated with different parameterisations which range from variants of the constant elasticity of variance model to various switching models which draw their justifications from the preliminary non-parametric analysis. The paper concludes by some implications for the term structure. It appears that a model good at reproducing the data density is not necessarily the best for simulating the yield curve.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2000038.

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Date of creation: 01 Aug 2000
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Handle: RePEc:cor:louvco:2000038

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Related research
Keywords: Bayesian econometrics; time series; non-parametric analysis; model evaluation; non-linear modelling; interest rates; term structure.;

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Find related papers by JEL classification:
C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates

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  1. Qi Li, 1996. "Nonparametric testing of closeness between two unknown distribution functions," Econometric Reviews, Taylor and Francis Journals, vol. 15(3), pages 261-274. [Downloadable!] (restricted)
  2. Koedijk, Kees G. & Nissen, Francois G.J.A. & Schotman, Peter C. & Wolff, Christian C.P., 1997. "The dynamics of short-term interest rate volatility reconsidered," Open Access publications from Maastricht University urn:nbn:nl:ui:27-13911, Maastricht University. [Downloadable!]
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  3. Gray, Stephen F., 1996. "Modeling the conditional distribution of interest rates as a regime-switching process," Journal of Financial Economics, Elsevier, vol. 42(1), pages 27-62, September. [Downloadable!] (restricted)
  4. Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1190-1219, December. [Downloadable!] (restricted)
  5. LUBRANO, Michel, 1998. "Smooth transition GARCH models: a Bayesian perspective," CORE Discussion Papers 1998066, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
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  6. Lubrano, M., 1998. "Bayesian Analysis of Nonlinear Time Series Models with a Threshold," G.R.E.Q.A.M. 98a13, Universite Aix-Marseille III.
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  7. Pfann, Gerard A. & Schotman, Peter C. & Tschernig, Rolf, 1996. "Nonlinear interest rate dynamics and implications for the term structure," Journal of Econometrics, Elsevier, vol. 74(1), pages 149-176, September. [Downloadable!] (restricted)
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