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, vol. 21(1), pages 311-346, January.
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- Charlotte Christiansen, 2008.
"Mean Reversion in US and International Short Rates,"
CREATES Research Papers
2008-47, School of Economics and Management, University of Aarhus.
- 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.
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- 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.
- 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.
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