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Title: | Is the Short Rate Drift Actually Nonlinear? |
Author(s): | Chapman, David A.; Pearson, Neil D. |
Subject(s): | nonparametric estimation
GMM estimation procedure Stanton Ait-Sahalia |
Abstract: | Virtually all existing continuous-time, single-factor term structure models are based on a short rate process that has a linear drift function. However, there is no strong a priori argument in favor of linearity, and Stanton (1997) and Ait-Sahalia (1996) employ nonparametric estimation techniques to conclude that the drift function of the short rate contains important nonlinearities. Comparatively little is known about the finite-sample properties of these estimators, particularly when they are applied to frequent sampling of a very persistent process, like short term interest rates. In this paper, we apply these estimators to simulated sample paths of a square-root diffusion. Although the drift function is linear, both estimators suggest nonlinearities of the type and magnitude reported in by Stanton (1997) and Ait-Sahalia (1996). These results, along with the results of a simple GMM estimation procedure applied to the Stanton and Ait-Sahalia data sets, imply that nonlinearity of the short rate drift is not a robust stylized fact. |
Issue Date: | 1998-06-16 |
Publisher: | Office for Futures and Options Research, Department of Agricultural Economics, College of Agricultural, Consumer, and Environmental Sciences at the University of Illinois at Urbana-Champaign |
Series/Report: | OFOR Working Paper Series, no. 98-07 |
Genre: | Working / Discussion Paper |
Type: | Text |
Language: | English |
URI: | http://hdl.handle.net/2142/4049 |
Publication Status: | published or submitted for publication |
Peer Reviewed: | not peer reviewed |
Date Available in IDEALS: | 2008-03-18 |