Does Conditioning Information Matter in Estimating Continuous Time Interest Rate Diffusions?

Posted: 11 Feb 2001

See all articles by Abhay Abhyankar

Abhay Abhyankar

University of Exeter Business School, University of Exeter

Devraj Basu

SKEMA Business School - Lille Campus

Abstract

We examine an important aspect of empirical estimation of term structure models; the role of conditioning information in dynamic term structure models. The use of both real-world or simulated data implicitly incorporates conditioning information. We examine the bias created, in estimating the drift, by a specific form of conditioning namely truncation. Using the theory of enlargement of filtrations, we provide estimates of the extent of this truncation bias for commonly used short rate models. We find that this truncation bias causes the drift of these models to have a nonlinear structure.

JEL Classification: G10, G12, G13

Suggested Citation

Abhyankar, Abhay and Basu, Devraj, Does Conditioning Information Matter in Estimating Continuous Time Interest Rate Diffusions?. Journal of Financial and Quantitative Analysis; Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=256533

Abhay Abhyankar

University of Exeter Business School, University of Exeter ( email )

Streatham Court
Exeter, EX4 4PU
United Kingdom

Devraj Basu (Contact Author)

SKEMA Business School - Lille Campus ( email )

Avenue Willy Brandt, Euralille
Lille, 59777
France

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