IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Short-term spot rate models with nonparametric deterministic drift

  • Al-Zoubi, Haitham A.

Most studies assume stationarity when testing continuous-time interest-rate models. However, consistent with Bierens [Bierens, H. (1997). Testing the unit root with drift hypothesis against nonlinear trend stationary, with an application to the US price level and interest rate. Journal of Econometrics, 81, 29-64; Bierens, H. (2000). Nonparametric nonlinear co-trending analysis, with an application to interest and inflation in the United States. Journal of Business and Economics Statistics, 18, 323-337], our nonparametric test results support nonlinear trend stationarity. To accommodate nonstationarity, we detrend the interest-rate series and re-examine a variety of continuous-time models. The goodness-of-fit improves significantly for those models with drift-induced mean reversion and worsens for those with high volatility elasticity. The inclusion of a nonparametric trend component in the drift significantly reduces the level effect on the interest-rate volatility. These results suggest that the misspecification of the constant elasticity model should be attributed to the nonlinear trend component of the short-term interest-rate process.

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://www.sciencedirect.com/science/article/B6W5X-4W7YXY2-1/2/e3671164a8aabb09eb6564610510b371
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

Volume (Year): 49 (2009)
Issue (Month): 3 (August)
Pages: 731-747

as
in new window

Handle: RePEc:eee:quaeco:v:49:y:2009:i:3:p:731-747
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620167

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. MacKinnon, James G, 1994. "Approximate Asymptotic Distribution Functions for Unit-Root and Cointegration Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(2), pages 167-76, April.
  2. Ait-Sahalia, Yacine, 1996. "Testing Continuous-Time Models of the Spot Interest Rate," Review of Financial Studies, Society for Financial Studies, vol. 9(2), pages 385-426.
  3. Bierens, Herman J., 1997. "Testing the unit root with drift hypothesis against nonlinear trend stationarity, with an application to the US price level and interest rate," Journal of Econometrics, Elsevier, vol. 81(1), pages 29-64, November.
  4. Dothan, L. Uri, 1978. "On the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 6(1), pages 59-69, March.
  5. David A. Chapman & John B. Long Jr. & Neil D. Pearson, 1998. "Using Proxies for the Short Rate: When are Three Months Like an Instant?," Finance 9808004, EconWPA, revised 07 Oct 1998.
  6. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
  7. Brennan, Michael J. & Schwartz, Eduardo S., 1980. "Analyzing Convertible Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(04), pages 907-929, November.
  8. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
  9. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
  10. Pritsker, Matt, 1998. "Nonparametric Density Estimation and Tests of Continuous Time Interest Rate Models," Review of Financial Studies, Society for Financial Studies, vol. 11(3), pages 449-87.
  11. Harvey, Campbell R., 1988. "The real term structure and consumption growth," Journal of Financial Economics, Elsevier, vol. 22(2), pages 305-333, December.
  12. Hansen, Bruce E, 1997. "Approximate Asymptotic P Values for Structural-Change Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(1), pages 60-67, January.
  13. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  14. Andersen, Torben G. & Lund, Jesper, 1997. "Estimating continuous-time stochastic volatility models of the short-term interest rate," Journal of Econometrics, Elsevier, vol. 77(2), pages 343-377, April.
  15. Brennan, Michael J. & Schwartz, Eduardo S., 1982. "An Equilibrium Model of Bond Pricing and a Test of Market Efficiency," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(03), pages 301-329, September.
  16. Stanton, Richard, 1997. " A Nonparametric Model of Term Structure Dynamics and the Market Price of Interest Rate Risk," Journal of Finance, American Finance Association, vol. 52(5), pages 1973-2002, December.
  17. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
  18. 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, 02.
  19. Christiansen, Charlotte, 2005. "Multivariate term structure models with level and heteroskedasticity effects," Journal of Banking & Finance, Elsevier, vol. 29(5), pages 1037-1057, May.
  20. Yongmiao Hong, 2005. "Nonparametric Specification Testing for Continuous-Time Models with Applications to Term Structure of Interest Rates," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 37-84.
  21. repec:ner:tilbur:urn:nbn:nl:ui:12-3108628 is not listed on IDEAS
  22. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
  23. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  24. Brennan, Michael J. & Schwartz, Eduardo S., 1977. "Savings bonds, retractable bonds and callable bonds," Journal of Financial Economics, Elsevier, vol. 5(1), pages 67-88, August.
  25. Dietrich-Campbell, Bruce & Schwartz, Eduardo, 1986. "Valuing debt options : Empirical evidence," Journal of Financial Economics, Elsevier, vol. 16(3), pages 321-343, July.
  26. Marsh, Terry A & Rosenfeld, Eric R, 1983. " Stochastic Processes for Interest Rates and Equilibrium Bond Prices," Journal of Finance, American Finance Association, vol. 38(2), pages 635-46, May.
  27. Longstaff, Francis A., 1989. "A nonlinear general equilibrium model of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 23(2), pages 195-224, August.
  28. Bandi, Federico M., 2002. "Short-term interest rate dynamics: a spatial approach," Journal of Financial Economics, Elsevier, vol. 65(1), pages 73-110, July.
  29. Conley, Timothy G, et al, 1997. "Short-Term Interest Rates as Subordinated Diffusions," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 525-77.
  30. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
  31. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 627-627, November.
  32. Arapis, Manuel & Gao, Jiti, 2004. "Empirical comparisons in short-term interest rate models using nonparametric methods," MPRA Paper 11974, University Library of Munich, Germany, revised 23 Dec 2005.
  33. Breitung, Jorg, 2002. "Nonparametric tests for unit roots and cointegration," Journal of Econometrics, Elsevier, vol. 108(2), pages 343-363, June.
  34. Yongmiao Hong & Haitao Li & Feng Zhao, 2004. "Out-of-Sample Performance of Discrete-Time Spot Interest Rate Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 457-473, October.
  35. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1980. " An Analysis of Variable Rate Loan Contracts," Journal of Finance, American Finance Association, vol. 35(2), pages 389-403, May.
Full references (including those not matched with items on IDEAS)

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

When requesting a correction, please mention this item's handle: RePEc:eee:quaeco:v:49:y:2009:i:3:p:731-747. 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: (Zhang, Lei)

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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.