An Empirical Comparison of Continuous Time Models of the Short Term Interest Rate PDF Download
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Author: Turan G. Bali
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
This paper compares the empirical performance of a wide variety of well-known diffusion models - with particular emphasis on the Black, Derman, and Toy (1990) term structure model - in capturing the dynamic behavior of interest rate volatility. Many popular models are nested within a more flexible time-varying BDT framework that allows us to determine the appropriate specification of the spot rate process. The empirical results for the one-month Treasury yields indicate that the equilibrium models that do not allow the drift and diffusion parameters to vary over time and parameterize the volatility only as a function of interest rate levels fail to model adequately the serial correlation in conditional variances. On the other hand, the serial-correlation-based arbitrage-free models with time-dependent parameters in the drift and diffusion functions may fail to capture adequately the relationship between interest rate levels and volatility. The results also suggest that time-varying volatilities within the BDT framework may lead to non-recombining binomial trees that increase the storage requirements and computational cost substantially in pricing interest rate contingent claims.
Author: Turan G. Bali
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
This paper compares the empirical performance of a wide variety of well-known diffusion models - with particular emphasis on the Black, Derman, and Toy (1990) term structure model - in capturing the dynamic behavior of interest rate volatility. Many popular models are nested within a more flexible time-varying BDT framework that allows us to determine the appropriate specification of the spot rate process. The empirical results for the one-month Treasury yields indicate that the equilibrium models that do not allow the drift and diffusion parameters to vary over time and parameterize the volatility only as a function of interest rate levels fail to model adequately the serial correlation in conditional variances. On the other hand, the serial-correlation-based arbitrage-free models with time-dependent parameters in the drift and diffusion functions may fail to capture adequately the relationship between interest rate levels and volatility. The results also suggest that time-varying volatilities within the BDT framework may lead to non-recombining binomial trees that increase the storage requirements and computational cost substantially in pricing interest rate contingent claims.
Author: Mona Ben Salah
Publisher:
ISBN:
Category :
Languages : en
Pages : 11
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Book Description
This article attempts to identify the best model of the short term interest rates that can predict its stochastic process over time.We studied eight different models of interest rates in the short term. The choice of these models was the aim of analyzing the relevance of certain specifications of the stochastic process of the short term interest rates, the effect of mean reversion and the sensitivity of the volatility to the level of interest rate.The yield on three months treasury bills is used as a proxy for the short term interest rates. The parameters of the different stochastic process are estimated using the generalized method of moments. The results show that the effect of mean reversion is not statistically significant and that volatility is highly sensitive to the level of interest rates.To further study the performance prediction of the intertemporal behavior of the short term interest rate of the various models; we simulated their stochastic process for different periods.The results show that none of the studied models reproduce the actual path of the short term interest rates. The problem lies in the parametric specification of the mean and volatility of the diffusion process.
Author: Xin Bo
Publisher:
ISBN:
Category : Interest rates
Languages : en
Pages : 0
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Book Description
The paper proposes a procedure for testing the alternative continuous time models of short term riskless interest rates. Parameters estimation and models comparison are presented using the Generalized Method of Moments. An empirical research to LIBOR in US dollar is given and found that the volatility of interest rate changes is to be less sensitive to the interest rate levels in contrast to previous findings. In addition the Brennan-Schwartz model is suggested to be superior to the others in term of data fit under daily observations, and CIR SR model cannot be rejected.
Author: Xin Bo
Publisher:
ISBN:
Category : Interest rates
Languages : en
Pages : 54
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Book Description
The paper proposes a procedure for testing the alternative continuous time models of short term riskless interest rates. Parameters estimation and models comparison are presented using the Generalized Method of Moments. An empirical research to LIBOR in US dollar is given and found that the volatility of interest rate changes is to be less sensitive to the interest rate levels in contrast to previous findings. In addition the Brennan-Schwartz model is suggested to be superior to the others in term of data fit under daily observations, and CIR SR model cannot be rejected.
Author: Clark Leavitt
Publisher:
ISBN:
Category : Accounting fraud
Languages : en
Pages : 418
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Book Description
Author: Manuel Arapis
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
This study applies the nonparametric estimation procedure to the diffusion process modeling the dynamics of short-term interest rates. This approach allows us to operate in continuous time, estimating the continuous-time model, despite the use of discrete data. Three methods are proposed. We apply these methods to two important financial data. After selecting an appropriate bandwidth for each dataset, empirical comparisons indicate that the specification of the drift has a considerable impact on the pricing of derivatives through its effect on the diffusion function. In addition, a novel nonparametric test has been proposed for specification of linearity in the drift. Our simulation directs us to reject the null hypothesis of linearity at the 5% significance level for the two financial datasets.
Author: Klaus Sandmann
Publisher: Springer Science & Business Media
ISBN: 9783540434641
Category : Business & Economics
Languages : en
Pages : 346
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Book Description
In many areas of finance and stochastics, significant advances have been made since this field of research was opened by Black, Scholes and Merton in 1973. This volume contains a collection of original articles by a number of highly distinguished authors, on research topics that are currently in the focus of interest of both academics and practitioners.
Author: Gennady A. Medvedev
Publisher: Springer
ISBN: 3030155005
Category : Mathematics
Languages : en
Pages : 230
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Book Description
This book is dedicated to the study of the term structures of the yields of zero-coupon bonds. The methods it describes differ from those usually found in the literature in that the time variable is not the term to maturity but the interest rate duration, or another convenient non-linear transformation of terms. This makes it possible to consider yield curves not only for a limited interval of term values, but also for the entire positive semiaxis of terms. The main focus is the comparative analysis of yield curves and forward curves and the analytical study of their features. Generalizations of yield term structures are studied where the dimension of the state space of the financial market is increased. In cases where the analytical approach is too cumbersome, or impossible, numerical techniques are used. This book will be of interest to financial analysts, financial market researchers, graduate students and PhD students.
Author: K. C. Chan
Publisher:
ISBN:
Category : Interest rates
Languages : en
Pages : 18
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Book Description
Author: Albert Rex Bergstrom
Publisher: Cambridge University Press
ISBN: 0521875498
Category : Business & Economics
Languages : en
Pages : 315
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Book Description
This monograph presents a continuous time macroeconometric model of the United Kingdom incorporating stochastic trends. It describes the model in detail to permit a rigorous mathematical analysis of its steady-state and stability properties, thus providing a valuable check on the capacity of the model to generate plausible long-run behaviour.
