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On The Small Sample Properties Of Dickey Fuller And Maximum Likelihood Unit Root Tests On Discrete-Sampled Short-Term Interest Rates

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  • Paulo M.M. Rodrigues

    (University of Algarve)

  • Antonio Rubia

    (Universidad de Alicante)

Abstract

Testing for unit roots in short-term interest rates plays a key role in the empirical modelling of these series. It is widely assumed that the volatility of interest rates follows some time-varying function which is dependent of the level of the series. This may cause distortions in the performance of conventional tests for unit root nonstationarity since these are typically derived under the assumption of homoskedasticity. Given the relative unfamiliarity on the issue, we conducted an extensive Monte Carlo investigation in order to assess the performance of the DF unit root tests, and examined the effects on the limiting distributions of test procedures (t- and likelihood ratio tests) based on maximum likelihood estimation of models for short-term rates with a linear drift.

Suggested Citation

  • Paulo M.M. Rodrigues & Antonio Rubia, 2004. "On The Small Sample Properties Of Dickey Fuller And Maximum Likelihood Unit Root Tests On Discrete-Sampled Short-Term Interest Rates," Working Papers. Serie AD 2004-11, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    • Handle: RePEc:ivi:wpasad:2004-11
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    References listed on IDEAS

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    Cited by:

    1. Olan T. Henry & Sandy Suardi, 2004. "Testing for a Level Effect in Short-Term Interest Rates," Department of Economics - Working Papers Series 924, The University of Melbourne.

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    More about this item

    Keywords

    Unit root; interest rates; CKLS model.;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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