Empirically Confronting Stochastic Singularity: An Application to the Cox, Ingersoll, and Ross Model

43 Pages Posted: 27 Dec 2005 Last revised: 14 Apr 2008

See all articles by Kenneth Roskelley

Kenneth Roskelley

Mississippi State University - Department of Finance & Economics

Chris Lamoureux

University of Arizona - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: April 2, 2008

Abstract

We just-identify a no-arbitrage term structure model in estimation and then test it using both a classical orthogonality restriction test and a test of conditional predictive ability. We treat the error structure as unmodeled heterogeneity so that the model is estimated without errors, and the statistical question is whether using the model to characterize the dynamics and patterns in historical data is either useful or optimal as a forecasting tool. The data we use are from the transparent Greenspan regime at the Fed (1989-2005), and we also use a rolling estimation format so that regime shifts are not a likely cause of the model's performance. Substantively we find that the model is not a good forecasting device for short rates which in this period are strongly effected by changes in the target Fed Funds rate. For longer term rates, especially at longer horizons where Fed policy has no effect, the model is more informative.

Keywords: Testing Models of Arbitrage, Forecasting Interest Rates

JEL Classification: C90, D40, G10

Suggested Citation

Roskelley, Kenneth and Lamoureux, Chris, Empirically Confronting Stochastic Singularity: An Application to the Cox, Ingersoll, and Ross Model (April 2, 2008). Available at SSRN: https://ssrn.com/abstract=871443 or http://dx.doi.org/10.2139/ssrn.871443

Kenneth Roskelley (Contact Author)

Mississippi State University - Department of Finance & Economics ( email )

Mississippi State, MS 39762
United States
662-325-1979 (Phone)

Chris Lamoureux

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-7488 (Phone)

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