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Is the Short Rate Drift Actually Nonlinear?

Author

Listed:
  • David A. Chapman

    (University of Texas at Austin,)

  • Neil D. Pearson

    (University of Illinois at Urbana-Champaign)

Abstract

Aït-Sahalia (1996) and Stanton (1997) use nonparametric estimators applied to short-term interest rate data to conclude that the drift function contains important nonlinearities. We study the finite-sample properties of their estimators by applying them to simulated sample paths of a square-root diffusion. Although the drift function is linear, both estimators suggest nonlinearities of the type and magnitude reported in Aït-Sahalia (1996) and Stanton (1997). Combined with the results of a weighted least squares estimator, this evidence implies that nonlinearity of the short rate drift is not a robust stylized fact. Copyright The American Finance Association 2000.

Suggested Citation

  • David A. Chapman & Neil D. Pearson, 2000. "Is the Short Rate Drift Actually Nonlinear?," Journal of Finance, American Finance Association, vol. 55(1), pages 355-388, February.
  • Handle: RePEc:bla:jfinan:v:55:y:2000:i:1:p:355-388
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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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