Advanced Search
MyIDEAS: Login to save this paper or follow this series

No-Arbitrage One-Factor Models of the South African Term-Structure of Interest Rates

Contents:

Author Info

  • Peter Aling
  • Shakill Hassan

Abstract

Short-term interest rate processes determine the term-structure of interest rates in an arbitrage-free market, and are central to the valuation of interest-rate derivatives. We obtain parameter estimates and compare the empirical fit of alternative one-factor continuous-time processes for the South African short-term interest rate (and hence of arbitrage-free term-structure models), using Gaussian estimation methods. We find support only for diffusions where the interest rate volatility is moderately sensitive to the level of the interest rate. Other common models with restrictions that either preclude this effect, or restrict it to be too high, do not fit the data. Differences in the specification of the drift function have no evident effect on model performance.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://econrsa.org/home/index.php?option=com_docman&task=doc_download&gid=360&Itemid=67
Download Restriction: no

Bibliographic Info

Paper provided by Economic Research Southern Africa in its series Working Papers with number 246.

as in new window
Length: 22 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:rza:wpaper:246

Contact details of provider:
Postal: Newlands on Main, F0301 3rd Floor Mariendahl House, cnr Campground and Main Rds, Claremont, 7700 Cape Town
Phone: 021 671-3980
Fax: +27 21 671 3912
Web page: http://www.econrsa.org/
More information through EDIRC

Related research

Keywords: bonds and interest-rate derivatives; arbitrage theory; maximum likelihood; continuous-time short rate models; term-structure of interest rates.;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Brenner, Robin J. & Harjes, Richard H. & Kroner, Kenneth F., 1996. "Another Look at Models of the Short-Term Interest Rate," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 31(01), pages 85-107, March.
  2. Janine Aron & John Muellbauer, 2001. "Estimating Monetary Policy rules for South Africa," Economics Series Working Papers WPS/2001-07, University of Oxford, Department of Economics.
  3. Chan, K C, et al, 1992. " An Empirical Comparison of Alternative Models of the Short-Term Interest Rate," Journal of Finance, American Finance Association, American Finance Association, vol. 47(3), pages 1209-27, July.
  4. Andrew Ang & Sen Dong & Monika Piazzesi, 2005. "No-arbitrage Taylor rules," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco.
  5. repec:fth:oxesaf:2001-7 is not listed on IDEAS
  6. Daniel L. Thornton, 2005. "Predictions of short-term rates and the expectations hypothesis of the term structure of interest rates," Working Papers, Federal Reserve Bank of St. Louis 2004-010, Federal Reserve Bank of St. Louis.
  7. Bergstrom, Albert Rex, 1983. "Gaussian Estimation of Structural Parameters in Higher Order Continuous Time Dynamic Models," Econometrica, Econometric Society, Econometric Society, vol. 51(1), pages 117-52, January.
  8. Bergstrom, A.R., 1984. "Continuous time stochastic models and issues of aggregation over time," Handbook of Econometrics, Elsevier, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 20, pages 1145-1212 Elsevier.
  9. Dothan, L. Uri, 1978. "On the term structure of interest rates," Journal of Financial Economics, Elsevier, Elsevier, vol. 6(1), pages 59-69, March.
  10. Bank for International Settlements, 2007. "Financial stability and local currency bond markets," CGFS Papers, Bank for International Settlements, number 28.
  11. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 177-188, November.
  12. Joyce, Michael & Relleen, Jonathan & Sorensen, Steffen, 2008. "Measuring monetary policy expectations from financial market instruments," Bank of England working papers 356, Bank of England.
  13. Shakill Hassan & Andrew van Biljon, 2009. "The Equity Premium and Risk-Free Rate Puzzles in a Turbulent Economy: Evidence from 105 Years of Data from South Africa," Working Papers 156, Economic Research Southern Africa.
  14. Bergstrom, A. R., 1985. "The Estimation of Parameters in Nonstationary Higher Order Continuous-Time Dynamic Models," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 1(03), pages 369-385, December.
  15. Alan Brace & Dariusz G�atarek & Marek Musiela, 1997. "The Market Model of Interest Rate Dynamics," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 7(2), pages 127-155.
  16. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, Econometric Society, vol. 53(2), pages 385-407, March.
  17. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, Elsevier, vol. 20(3), pages 381-408, June.
  18. Bergstrom, A. R., 1986. "The Estimation of Open Higher-Order Continuous Time Dynamic Models with Mixed Stock and Flow Data," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 2(03), pages 350-373, December.
  19. Tse, Y. K., 1995. "Some international evidence on the stochastic behavior of interest rates," Journal of International Money and Finance, Elsevier, Elsevier, vol. 14(5), pages 721-738, October.
  20. Farshid Jamshidian, 1997. "LIBOR and swap market models and measures (*)," Finance and Stochastics, Springer, Springer, vol. 1(4), pages 293-330.
  21. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  22. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 1029-54, July.
  23. Mc Manus, Des & Watt, David, 1999. "Estimating One-Factor Models of Short-Term Interest Rates," Working Papers, Bank of Canada 99-18, Bank of Canada.
  24. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 12(04), pages 627-627, November.
  25. Eric Schaling, 2009. "Capital Controls, Two-Tiered Exchange Rate Systems And Exchange Rate Policy: The South African Experience," South African Journal of Economics, Economic Society of South Africa, Economic Society of South Africa, vol. 77(4), pages 505-530, December.
  26. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, Econometric Society, vol. 60(1), pages 77-105, January.
  27. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1980. " An Analysis of Variable Rate Loan Contracts," Journal of Finance, American Finance Association, American Finance Association, vol. 35(2), pages 389-403, May.
  28. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:rza:wpaper:246. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Yoemna Mosaval).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.