Title

Drift and Diffusion Function Specification for Short-Term Interest Rates

Publication Type

Journal Article

Publication Date

2005

Abstract

Various stochastic differential equation models for short rates (rt) have been proposed, where the change (Δrt=rt−rt−1) is modeled as a sum of drift and diffusion terms depending on rt−1. These models, however, have some shortcomings. First, the same model may not apply to all countries. Second, the drift and diffusion may depend not only on rt−1 but also on further lags. Third, not just the own lagged rates, but also other countries' rates may matter. These questions are empirically analyzed for six major countries with the following findings. First, there are considerable differences in drift and diffusion across the countries. Second, the drift and diffusion often depend on rt−2 (and rt−3). Third, foreign rates exert substantial effects.

Keywords

Short rate; Diffusion; Spatial correlation

Discipline

Econometrics

Research Areas

Econometrics

Publication

Economics Letters

Volume

86

Issue

3

First Page

339

Last Page

346

ISSN

0165-1765

Identifier

10.1016/j.econlet.2004.09.002

Publisher

Elsevier

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

http://dx.doi.org/10.1016/j.econlet.2004.09.002

This document is currently not available here.

Share

COinS