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Indirect Robust Estimation of the Short-term Interest Rate Process;

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  • Veronika Czellar
  • G. Andrew Karolyi
  • Elvezio Ronchetti

Abstract

We introduce Indirect Robust Generalized Method of Moments (IRGMM), a new simulation-based estimation methodology, to model short-term interest rate processes. The primary advantage of IRGMM relative to classical estimators of the continuous-time short-rate diffusion processes is that it corrects both the errors due to discretization and the errors due to model misspecification. We apply this new approach to various monthly and weekly Eurocurrency interest rate series.

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Bibliographic Info

Paper provided by Département des Sciences Économiques, Université de Genève in its series Research Papers by the Department of Economics, University of Geneva with number 2005.02.

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Length: 29 pages
Date of creation: Mar 2005
Date of revision:
Handle: RePEc:gen:geneem:2005.02

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Keywords: GMM and RGMM estimators; CKLS one factor model; indirect inference;

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References

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  1. Alexandros Beskos & Omiros Papaspiliopoulos & Gareth O. Roberts & Paul Fearnhead, 2006. "Exact and computationally efficient likelihood-based estimation for discretely observed diffusion processes (with discussion)," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 68(3), pages 333-382.
  2. David A. Chapman & Neil D. Pearson, 1998. "Is the Short Rate Drift Actually Nonlinear?," Finance 9808005, EconWPA.
  3. Dell'Aquila, Rosario & Ronchetti, Elvezio & Trojani, Fabio, 2003. "Robust GMM analysis of models for the short rate process," Journal of Empirical Finance, Elsevier, vol. 10(3), pages 373-397, May.
  4. David A. Chapman & John B. Long Jr. & Neil D. Pearson, 1998. "Using Proxies for the Short Rate: When are Three Months Like an Instant?," Finance 9808004, EconWPA, revised 07 Oct 1998.
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Citations

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Cited by:
  1. Peter Fuleky, 2011. "On the Choice of the Unit Period in Time Series Models," Working Papers 2011-4, University of Hawaii Economic Research Organization, University of Hawaii at Manoa.
  2. Charlotte Christiansen, 2007. "Level-ARCH Short Rate Models with Regime Switching: Bivariate Modeling of US and European Short Rates," CREATES Research Papers 2007-05, School of Economics and Management, University of Aarhus.
  3. Loisel, Sébastien & Takane, Marina, 2009. "Fast indirect robust generalized method of moments," Computational Statistics & Data Analysis, Elsevier, vol. 53(10), pages 3571-3579, August.
  4. Veronika Czellar & Elvezio Ronchetti, 2008. "Accurate and robust indirect inference for diffusion models," Research Papers by the Department of Economics, University of Geneva 2008.01, Département des Sciences Économiques, Université de Genève.
  5. Hou, Ai Jun & Suardi, Sandy, 2011. "Modelling and forecasting short-term interest rate volatility: A semiparametric approach," Journal of Empirical Finance, Elsevier, vol. 18(4), pages 692-710, September.
  6. Asimit, Alexandru V. & Badescu, Alexandru M. & Verdonck, Tim, 2013. "Optimal risk transfer under quantile-based risk measurers," Insurance: Mathematics and Economics, Elsevier, vol. 53(1), pages 252-265.

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