Modeling the U.S. Short-Term Interest Rate by Mixture Autoregressive Processes

34 Pages Posted: 5 Jul 2001

See all articles by Markku Lanne

Markku Lanne

University of Helsinki - Department of Political and Economic Studies

Pentti Saikkonen

University of Helsinki - Department of Statistics

Multiple version iconThere are 2 versions of this paper

Abstract

A new kind of mixture autoregressive model with GARCH errors is introduced and applied to the U.S. short-term interest rate. According to the diagnostic tests developed in the paper and further informal checks the model is capable of capturing volatility persistence and the dependence of volatility on the level of the interest rate. Realizations generated from the estimated model seem stable and their properties resemble those of the observed series closely. The implied drift and diffusion functions are in accordance with the results in much of the literature on continuous-time diffusion models for the short-term interest rate.

Keywords: mixture model, volatility, interest rate

JEL Classification: C22, G12

Suggested Citation

Lanne, Markku and Saikkonen, Pentti, Modeling the U.S. Short-Term Interest Rate by Mixture Autoregressive Processes. EFA 2001 Barcelona Meetings. Available at SSRN: https://ssrn.com/abstract=275968 or http://dx.doi.org/10.2139/ssrn.275968

Markku Lanne (Contact Author)

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland
+358-9-191 24626 (Phone)
+358-9-191 24780 (Fax)

Pentti Saikkonen (Contact Author)

University of Helsinki - Department of Statistics ( email )

Finland
+09 191 24867 (Phone)

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