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Is Nonlinear Drift Implied by the Short-End of the Term Structure?

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  • Takamizawa, Hideyuki

Abstract

Nonlinear 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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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/16926/1/070econDP06-08.pdf
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Bibliographic Info

Paper provided by Graduate School of Economics, Hitotsubashi University in its series Discussion Papers with number 2006-08.

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Length: 42 p.
Date of creation: Nov 2006
Date of revision:
Handle: RePEc:hit:econdp:2006-08

Note: November 22, 2006
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Web page: http://www.econ.hit-u.ac.jp/
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Related research

Keywords: Short-Rate; Nonlinear Drift; Term Structure; Linear Approximation;

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Cited by:
  1. Christiansen, Charlotte, 2010. "Mean reversion in US and international short rates," The North American Journal of Economics and Finance, Elsevier, vol. 21(3), pages 286-296, December.
  2. Li, Minqiang, 2013. "An examination of the continuous-time dynamics of international volatility indices amid the recent market turmoil," Journal of Empirical Finance, Elsevier, vol. 22(C), pages 128-139.
  3. Mario Cerrato & Chia Chun Lo & Konstantinos Skindilias, 2011. "Adaptive continuous time Markov chain approximation model to general jump-diffusions," Working Papers 2011_16, Business School - Economics, University of Glasgow.
  4. Hideyuki Takamizawa, 2007. "A Simple Measure for Examining the Proxy Problem of the Short-Rate," Asia-Pacific Financial Markets, Springer, vol. 14(4), pages 341-361, December.
  5. Song, Zhaogang, 2011. "A martingale approach for testing diffusion models based on infinitesimal operator," Journal of Econometrics, Elsevier, vol. 162(2), pages 189-212, June.

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