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Itô conditional moment generator and the estimation of short rate processes

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  • Hao Zhou
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Abstract

This paper exploits the Itô's formula to derive the conditional moments vector for the class of interest rate models that allow for nonlinear volatility and flexible jump specifications. Such a characterization of continuous-time processes by the Ito Conditional Moment Generator noticeably enlarges the admissible set beyond the affine jump-diffusion class. A simple GMM estimator can be constructed based on the analytical solution to the lower order moments, with natural diagnostics of the conditional mean, variance, skewness, and kurtosis. Monte Carlo evidence suggests that the proposed estimator has desirable finite sample properties, relative to the asymptotically efficient MLE. The empirical application singles out the nonlinear quadratic variance as the key feature of the U.S. short rate dynamics.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2003-32.

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Date of creation: 2003
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Handle: RePEc:fip:fedgfe:2003-32

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Keywords: Interest rates;

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References

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Citations

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Cited by:
  1. Garcia, René & Lewis, Marc-André & Pastorello, Sergio & Renault, Éric, 2011. "Estimation of objective and risk-neutral distributions based on moments of integrated volatility," Journal of Econometrics, Elsevier, vol. 160(1), pages 22-32, January.
  2. Michael Sørensen & Julie Lyng Forman, 2007. "The Pearson diffusions: A class of statistically tractable diffusion processes," CREATES Research Papers 2007-28, School of Economics and Management, University of Aarhus.
  3. Christa Cuchiero & Martin Keller-Ressel & Josef Teichmann, 2012. "Polynomial processes and their applications to mathematical finance," Finance and Stochastics, Springer, vol. 16(4), pages 711-740, October.

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