Resistant Nonparametric Analysis of the Short Term Rate
Aït Sahalia (1996), Stanton (1997) and Jiang (1998) apply nonparametric and semi-parametric estimators to the short term interest rate and find strong nonlinearities in the drift function. In this paper we apply resistant techniques to the estimation of the drift and diffusion function. We show how the influential observations resulting from a resistant estimation of drift and diffusion may be used as a diagnostic tool to understand whether the estimated drift and diffusion function are broadly consistent with the assumed diffusion process. In an empirical exercise using Stanton’s (1997) and Aït-Sahalia’s (1996) data we find a clustering of influential observations in the pre 1982 period, in particular in the 1972-1974 and 1979-1982 period, suggesting that a regime change may be the dominant feature in the data rather than nonlinearities in the drift. As an additional result, we show that the bias reported in Chapman and Pearson (2000) is exaggerated because of the extrapolation of interest rate values outside the range of the simulated series.
|Date of creation:||Jul 2004|
|Date of revision:|
|Contact details of provider:|| Postal: 40 Boulevard du Pont-d'Arve, CH-1211 Geneva 4, Switzerland|
Phone: +41 22 379 8263
Fax: +41 22 379 82 93
Web page: http://www.unige.ch/gsem/dsec/index.html
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.:
- Oliver LINTON, .
"Applied nonparametric methods,"
Statistic und Oekonometrie
9312, Humboldt Universitaet Berlin.
- Chan, K C, et al, 1992.
" An Empirical Comparison of Alternative Models of the Short-Term Interest Rate,"
Journal of Finance,
American Finance Association, vol. 47(3), pages 1209-27, July.
- Tom Doan, . "RATS programs to replicate CKLS(1992) estimation of interest rate models," Statistical Software Components RTZ00035, Boston College Department of Economics.
- Hardle, W., 1992.
"Applied Nonparametric Methods,"
9206, Tilburg - Center for Economic Research.
- HÄRDLE, Wolfgang, 1992. "Applied nonparametric methods," CORE Discussion Papers 1992003, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Wolfgang Hardle & Oliver Linton, 1994. "Applied Nonparametric Methods," Cowles Foundation Discussion Papers 1069, Cowles Foundation for Research in Economics, Yale University.
- Härdle, W.K., 1992. "Applied Nonparametric Methods," Discussion Paper 1992-6, Tilburg University, Center for Economic Research.
- Hardle, W., 1992. "Applied Nonparametric Methods," Papers 9204, Catholique de Louvain - Institut de statistique.
- Ang, Andrew & Bekaert, Geert, 2002. "Short rate nonlinearities and regime switches," Journal of Economic Dynamics and Control, Elsevier, vol. 26(7-8), pages 1243-1274, July.
- 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.
- Ahn, Dong-Hyun & Gao, Bin, 1999. "A Parametric Nonlinear Model of Term Structure Dynamics," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 721-62.
- 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.
- Yacine Ait-Sahalia, 1995. "Testing Continuous-Time Models of the Spot Interest Rate," NBER Working Papers 5346, National Bureau of Economic Research, Inc.
- David A. Chapman & Neil D. Pearson, 1998.
"Is the Short Rate Drift Actually Nonlinear?,"
- Haerdle,W. & Tsybakov,A., 1986. "Robust nonparametric regression with simultaneous scale curve estimation," Discussion Paper Serie A 59, University of Bonn, Germany.
When requesting a correction, please mention this item's handle: RePEc:gen:geneem:2004.06. 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: ()
If references are entirely missing, you can add them using this form.