Is Nonlinear Drift Implied by the Short-End of the Term Structure?
AbstractNonlinear drift models of the short-rate are estimated using data on the short-end of the term structure, where the cross-sectional relation is obtained by an analytical approximation. We find that (i) nonlinear physical drift is not implied unless it is strongly affected by cross-sectional dimensions of the data; (ii) nonlinear risk-neutral drift that allows for fast mean-reversion for high rates is desirable to explain and predict observed patterns of yield spreads; and (iii) for higher-frequency data from which transitory shocks are removed, (ii) still remains valid although the nonlinearity is somewhat reduced.
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Bibliographic InfoPaper provided by Graduate School of Economics, Hitotsubashi University in its series Discussion Papers with number 2006-08.
Length: 42 p.
Date of creation: Nov 2006
Date of revision:
Short-Rate; Nonlinear Drift; Term Structure; Linear Approximation;
Other versions of this item:
- Hideyuki Takamizawa, 2008. "Is Nonlinear Drift Implied by the Short End of the Term Structure?," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 21(1), pages 311-346, January.
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- Hideyuki Takamizawa, 2007. "A Simple Measure for Examining the Proxy Problem of the Short-Rate," Asia-Pacific Financial Markets, Springer, Springer, vol. 14(4), pages 341-361, December.
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