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Testing for Continuous-Time Models of the Short-Term Interest Rate

Listed author(s):
  • BROZE, Laurence

    ()

    (CORE, Université catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium and Université Lille 3, Villeneuve d’Ascq, France)

  • SCAILLET, Olivier

    (CEME and Ecole de Commerce Solvay, Université Libre de Bruxelles)

  • ZAKOIAN , Jean-Michel

    (CORE and CREST)

The recent financial literature has been much concerned with the short-term interest rate. Several models have been proposed and studied quite extensively. Despite the number of models, relatively little is known about their empirical comparison. A first approach of this problem is proposed in CHAN, KAROLYI, LONGSTAFF and SANDERS (1992) using a Generalized Method of Moments. In this paper, we give a general form encompassing the most usual models and derive a well specified discrete time version. Then we study the ergodic properties in order to build a consistent econometric procedure based on a maximum likelihood approach. An empirical comparison is performed using U.S. Treasury Bill data. Finally we propose an estimation strategy, based on a two-step indirect simulated method, to account for the discretization bias.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 1993031.

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Date of creation: 01 Jul 1993
Handle: RePEc:cor:louvco:1993031
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