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Nonlinear Mean Reversion In The Term Structure Of Interest Rates

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  • Byeongseon Seo

    (Soongsil University)

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    Abstract

    An important factor of regional development is innovative process. The innovations include new products, new technologies, new ways of commercial use of goods, conquering of new markets, new sources of raw materials and other qualitative trahsformations which can change current economic situation. Now they become the basic buisness strategies, main sources of welfare and development in which knowledge and social capital create the competitive advatages of regions more than their natural resources.The main methodological problem of modeling such processes is that they are incorporated into real picture of development whereas it is necessary to separate them from other processes to perform their fruitful analysis, in particular to compare the related costs with the total resulted effect. Our approach to solve this problem is to modify a familiar previously created model without innovations via addition a special submodel which describe visually the innovative processes, as favorable change of originally constant model parameters.The main difficulty arise when we attempt to present strictly the dynamics of great amount of the original model parameters (about square of the number of original variables). To overcome this difficulty the opportunity of aggregative description of innovative block with different levels of aggregation variable is provided.The modified model structure becomes essentially nonlinear and does not allow to apply strictly the special high effective optimization method which make use of lineariyies in the original model. For this reason a multistep optimization procedure is developed where optimization of the original model with given parameters is accompanied by their inprovement on account of control in the innovative submodel. The approach proposed is demonstrated by concrete application to Pereslavl region of Russia.

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    Bibliographic Info

    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2000 with number 121.

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    Date of creation: 05 Jul 2000
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    Handle: RePEc:sce:scecf0:121

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    Postal: CEF 2000, Departament d'Economia i Empresa, Universitat Pompeu Fabra, Ramon Trias Fargas, 25,27, 08005, Barcelona, Spain
    Fax: +34 93 542 17 46
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    Web page: http://enginy.upf.es/SCE/
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    1. Pierluigi Balduzzi & Giuseppe Bertola & Silverio Foresi, 1993. "A Model of Target Changes and the Term Structure of Interest Rates," NBER Working Papers 4347, National Bureau of Economic Research, Inc.
    2. Mankiw, N Gregory & Miron, Jeffrey A, 1986. "The Changing Behavior of the Term Structure of Interest Rates," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 211-28, May.
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    7. Friedman, Benjamin Morton, 1977. "Financial Flow Variables and the Short-Run Determination of Long-Term Interest Rates," Scholarly Articles 4554309, Harvard University Department of Economics.
    8. Campbell, John Y & Shiller, Robert J, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 495-514, May.
    9. John Y. Campbell, 1995. "Some Lessons from the Yield Curve," NBER Working Papers 5031, National Bureau of Economic Research, Inc.
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    16. Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1190-1219, December.
    17. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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    19. Jegadeesh, Narasimhan & Pennacchi, George G, 1996. "The Behavior of Interest Rates Implied by the Term Structure of Eurodollar Futures," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 426-46, August.
    20. Modigliani, Franco & Shiller, Robert J, 1973. "Inflation, Rational Expectations and the Term Structure of Interest Rates," Economica, London School of Economics and Political Science, vol. 40(157), pages 12-43, February.
    21. Balke, Nathan S & Fomby, Thomas B, 1997. "Threshold Cointegration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-45, August.
    22. Sargent, Thomas J, 1972. "Rational Expectations and the Term Structure of Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 4(1), pages 74-97, Part I Fe.
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