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Comparison of the performance of a time-dependent short-interest rate model with time-independent models


  • Joanna Goard
  • Noel Hansen


The coefficients in the stochastic differential equation that the short interest rate follows are of vital importance in the subsequent modelling of bond prices and other interest rate products. Empirical tests have previously been performed by various authors who compare a variety of popular short-rate models. Most recently, Ahn and Gao compared their model with affine-drift models and showed that their model with a non-linear drift function outperforms the others. This paper compares the model developed by Goard, which is a time-dependent generalization of the Ahn-Gao model, with the Ahn-Gao model itself. It is found that the time-dependent model using a second-order Fourier series in time, outperforms the Ahn-Gao model for all data sets considered.

Suggested Citation

  • Joanna Goard & Noel Hansen, 2004. "Comparison of the performance of a time-dependent short-interest rate model with time-independent models," Applied Mathematical Finance, Taylor & Francis Journals, vol. 11(2), pages 147-164.
  • Handle: RePEc:taf:apmtfi:v:11:y:2004:i:2:p:147-164 DOI: 10.1080/13504860410001686034

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    References listed on IDEAS

    1. Lucas, Andre & Klaassen, Pieter & Spreij, Peter & Straetmans, Stefan, 2001. "An analytic approach to credit risk of large corporate bond and loan portfolios," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1635-1664, September.
    2. Bangia, Anil & Diebold, Francis X. & Kronimus, Andre & Schagen, Christian & Schuermann, Til, 2002. "Ratings migration and the business cycle, with application to credit portfolio stress testing," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 445-474, March.
    3. Gordy, Michael B., 2000. "A comparative anatomy of credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 119-149, January.
    4. Mark Carey, 1998. "Credit Risk in Private Debt Portfolios," Journal of Finance, American Finance Association, vol. 53(4), pages 1363-1387, August.
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    short-rate; interest rate models;


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