Mean Reversion in US and International Short Rates
27 Pages Posted: 9 Aug 2008
Date Written: August 8, 2008
In this paper we extend the CKLS one factor short rate model to include extreme value nonlinear mean reversion. Similarly to a recent stock market study, we include the smallest short rate during the previous year in the mean equation. We investigate the US and five other major markets (Canada, Germany, Japan, Switzerland, and the UK). There is extreme value mean reversion in the US short rate. For Japan there is both linear and nonlinear mean reversion. For the remaining short rates there is no evidence of mean reversion.
Keywords: Short term interest rate, Mean reversion, Extreme value, Nonlinearity
JEL Classification: G12, G15, E43, C13
Suggested Citation: Suggested Citation
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By Mohamed Saeh