Testing Continuous-Time Models of the Spot Interest Rate

42 Pages Posted: 29 Jun 2000 Last revised: 12 Aug 2022

See all articles by Yacine Ait-Sahalia

Yacine Ait-Sahalia

Princeton University - Department of Economics

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Date Written: November 1995


Different continuous-time models for interest rates coexist in the literature. We test parametric models by comparing their implied parametric density to the same density estimated nonparametrically. We do not replace the continuous-time model by discrete approximations, even though the data are recorded at discrete intervals. The principal source of rejection of existing models is the strong nonlinearity of the drift. Around its mean, where the drift is essentially zero, the spot rate behaves like a random walk. The drift then mean-reverts strongly when far away from the mean. The volatility is higher when away from the mean.

Suggested Citation

Ait-Sahalia, Yacine, Testing Continuous-Time Models of the Spot Interest Rate (November 1995). NBER Working Paper No. w5346, Available at SSRN: https://ssrn.com/abstract=225410

Yacine Ait-Sahalia (Contact Author)

Princeton University - Department of Economics ( email )

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