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Testing for continuous-time models of the short-term interest rate

  • BROZE, L.
  • SCAILLET, O.
  • ZAKOÏAN, J.-M.

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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File URL: http://dx.doi.org/10.1016/0927-5398(95)00003-D
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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers RP with number -1177.

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Handle: RePEc:cor:louvrp:-1177
Note: In : of Empirical Finance, 2, 199-223, 1995
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  1. 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.
  2. Andrew W. Lo, . "Maximum Likelihood Estimation of Generalized Ito Processes with Discretely Sampled Data," Rodney L. White Center for Financial Research Working Papers 15-86, Wharton School Rodney L. White Center for Financial Research.
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  15. Ernst R. Berndt & Bronwyn H. Hall & Robert E. Hall & Jerry A. Hausman, 1974. "Estimation and Inference in Nonlinear Structural Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 4, pages 653-665 National Bureau of Economic Research, Inc.
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  19. Michael J. Brennan and Eduardo S. Schwartz., 1979. "A Continuous-Time Approach to the Pricing of Bonds," Research Program in Finance Working Papers 85, University of California at Berkeley.
  20. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
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  22. Langetieg, Terence C, 1980. " A Multivariate Model of the Term Structure," Journal of Finance, American Finance Association, vol. 35(1), pages 71-97, March.
  23. 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.
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  25. Dothan, L. Uri, 1978. "On the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 6(1), pages 59-69, March.
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