Is Nonlinear Drift Implied by the Short-End of the Term Structure?
Nonlinear drift models of the short-rate are estimated using data on the short-end of the term structure, where the cross-sectional relation is obtained by an analytical approximation. We find that (i) nonlinear physical drift is not implied unless it is strongly affected by cross-sectional dimensions of the data; (ii) nonlinear risk-neutral drift that allows for fast mean-reversion for high rates is desirable to explain and predict observed patterns of yield spreads; and (iii) for higher-frequency data from which transitory shocks are removed, (ii) still remains valid although the nonlinearity is somewhat reduced.
|Date of creation:||Nov 2006|
|Date of revision:|
|Note:||November 22, 2006|
|Contact details of provider:|| Phone: +81-42-580-8000|
Web page: http://www.econ.hit-u.ac.jp/
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