On the Robustness of Short-Term Interest Rate Models

Treepongkaruna, Sirimon; Gray, Stephen

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On the Robustness of Short-Term Interest Rate Models

35 Pages Posted: 19 Mar 2003

See all articles by Sirimon Treepongkaruna

Sirimon Treepongkaruna

The University of Western Australia; Financial Research Network (FIRN)

Stephen Gray

University of Queensland - Business School; Duke University - Fuqua School of Business; Financial Research Network (FIRN)

Abstract

This paper investigates the robustness of a range of short-term interest rate models. We examine the robustness of these models over different data sets, time periods, sampling frequencies, and estimation techniques. We examine a range of popular one-factor models that allow the conditional mean (drift) and conditional variance (diffusion) to be functions of the current short rate. We find that parameter estimates are highly sensitive to all of these factors in the eight countries that we examine. Since parameter estimates are not robust, these models should be used with caution in practice.

Keywords: Short-term interest rates, mean reversion, conditional volatility

JEL Classification: C52, E43, G15

Suggested Citation: Suggested Citation

Treepongkaruna, Sirimon and Gray, Stephen, On the Robustness of Short-Term Interest Rate Models. Available at SSRN: https://ssrn.com/abstract=376509