Testing Continuous-Time Models of the Spot Interest Rate

REVIEW OF FINANCIAL STUDIES, Vol. 9 No. 2

Posted: 29 May 1996

See all articles by Yacine Ait-Sahalia

Yacine Ait-Sahalia

Princeton University - Department of Economics

Multiple version iconThere are 3 versions of this paper

Abstract

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.

JEL Classification: G12, C13, C22

Suggested Citation

Ait-Sahalia, Yacine, Testing Continuous-Time Models of the Spot Interest Rate. REVIEW OF FINANCIAL STUDIES, Vol. 9 No. 2, Available at SSRN: https://ssrn.com/abstract=7452

Yacine Ait-Sahalia (Contact Author)

Princeton University - Department of Economics ( email )

Fisher Hall
Princeton, NJ 08544
United States
609-258-4015 (Phone)
609-258-5398 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
859
PlumX Metrics