A Revised Approach to CIR Short-Term Interest Rates Model

33 Pages Posted: 27 May 2017

See all articles by Giuseppe Orlando

Giuseppe Orlando

Università degli Studi di Bari “Aldo Moro” (UNIBA) - Department of Economics and Mathematical Methods; Università degli Studi di Camerino - School of Science and Technologies

Rosa Maria Mininni

Dipartimento di Matematica - Università degli Studi di Bari Aldo Moro

Michele Bufalo

University of Rome I

Date Written: August 30, 2016

Abstract

It is well known that the Cox-Ingersoll-Ross (CIR) stochastic model to study the term structure of interest rates, as introduced in 1985, is inadequate for modelling the current market environment with negative short interest rates. Moreover, the diffusion term in the rate dynamics goes to zero when short rates are small; both volatility and long-run mean do not change with time; they do not fit with the skewed (fat tails) distribution of the interest rates, etc. The aim of the present work is to suggest a new framework, which we call the CIR # model, that fits well the term structure of short interest rates such that the market volatility structure is preserved as well as the analytical tractability of the original CIR model.

Keywords: Interest rates forecasting, volatility, ARIMA models, simulation, jumps fitting, translation

JEL Classification: G12, E43, E47

Suggested Citation

Orlando, Giuseppe and Mininni, Rosa Maria and Bufalo, Michele, A Revised Approach to CIR Short-Term Interest Rates Model (August 30, 2016). Available at SSRN: https://ssrn.com/abstract=2975108 or http://dx.doi.org/10.2139/ssrn.2975108

Giuseppe Orlando (Contact Author)

Università degli Studi di Bari “Aldo Moro” (UNIBA) - Department of Economics and Mathematical Methods ( email )

Via C. Rosalba 53
VI Floor, Room 12
Bari, 70124
Italy
+39 080 5049218 (Phone)

Università degli Studi di Camerino - School of Science and Technologies ( email )

Via M. delle Carceri 9
Camerino, 62032
Italy

Rosa Maria Mininni

Dipartimento di Matematica - Università degli Studi di Bari Aldo Moro ( email )

Campus universitario - Via Orabona, 4
Bari, Bari 70125
Italy

Michele Bufalo

University of Rome I ( email )

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