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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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Author Info
Paulo M. M. Rodrigues (Faculty of Economics; University of Algarve)
Antonio Rubia (Department of Financial Economics; University of Alicante)

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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.

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Paper provided by EconWPA in its series Econometrics with number 0405004.

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Length: 31 pages
Date of creation: 28 May 2004
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Handle: RePEc:wpa:wuwpem:0405004

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Related research
Keywords: Unit root; interest rates; CKLS model.;

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Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates

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    Other versions:
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  23. Bali, Turan G., 2003. "Modeling the stochastic behavior of short-term interest rates: Pricing implications for discount bonds," Journal of Banking & Finance, Elsevier, vol. 27(2), pages 201-228, February. [Downloadable!] (restricted)
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    Other versions:
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