Is There a Structural Break in the Risk Free Interest Rate Dynamics?

13 Pages Posted: 23 Mar 2006 Last revised: 14 Feb 2008

Jun Ma

University of Alabama - Department of Economics, Finance and Legal Studies

Date Written: February 5, 2008

Abstract

I use the endogenous structural breakpoint tests to search for a structural change in the risk free interest rate dynamics based on the model proposed by Chan, Karolyi, Longstaff and Sanders (1992) (hereafter CKLS). Monte Carlo experiments show that a reliance of the asymptotic distribution leads to a size distortion in finite sample, but bootstrapping can reduce the size distortion. My results indicate a mild evidence of a structural break in the risk free rate which coincides with the monetary policy change in the early 1980s and after that the volatility of risk free rate dropped dramatically.

Keywords: endogenous structural breakpoint test, CKLS model, GMM, bootstrap

JEL Classification: C12, C15, E43, G12

Suggested Citation

Ma, Jun, Is There a Structural Break in the Risk Free Interest Rate Dynamics? (February 5, 2008). Available at SSRN: https://ssrn.com/abstract=889681 or http://dx.doi.org/10.2139/ssrn.889681

Jun Ma (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

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