archive of the former site EconWPA.wustl.edu

Please do not link or reference this page. Use one of the following URLs:
ideas.repec.org as http://ideas.repec.org/p/wpa/wuwpfi/9808004.html
econpapers.repec.org as http://econpapers.repec.org/paper/wpawuwpfi/9808004.htm

Using Proxies for the Short Rate: When are Three Months Like an Instant?

Paper:ewp-fin/9808004
From:    
Date: Fri, 28 Aug 1998 12:13:02 -0500
Date (revised): Wed, 7 Oct 1998 12:58:58 -0500

Title: Using Proxies for the Short Rate: When are Three Months Like an Instant?
Author: David A. Chapman (The University of Texas at Austin) and John B. Long Jr. (University of Rochester) and Neil D. Pearson (University of Illinois at Urbana-Champaign)
Contact:
Comments: Type of Document - pdf; prepared on pc; to print on unknown; pages: 30; figures: included. Office for Futures and Options Research (OFOR) at the University of Illinois at Urbana-Champaign. Working Paper 98-06. For a complete list of OFOR working papers see http://w3.ag.uiuc.edu/ACE/ofor
Keywords: interest rates, proxies, term structure
JEL: G1
EWPA-references:
Report-no: OFOR-98-06

Abstract:

The dynamics of the unobservable "short" or "instantaneous" rate of interest are frequently estimated using a proxy variable. We show the biases resulting from this practice (the "proxy" problem) are related to the derivatives of the proxy with respect to the short rate and the (inverse) function from the proxy to the short rate. Analytic results show that the proxy problem is not economically significant for single- factor affine models, for parameter values consistent with US data. In addition, for the two-factor affine model of Longstaff and Schwartz (1992), the proxy problem is only economically significant for pricing discount bonds with maturities of more than 5 years. We also describe two different procedures which can be used to assess the magnitude of the proxy problem in more general interest rate models. Numerical evaluation of a nonlinear single-factor model suggests that the proxy problem can significantly affect both estimates of the diffusion function and discount bond prices.

Acrobat pdf files:(viewing .pdf) archive: 9808004.pdf is 396196 bytes, 9-7-98, or 9808004.pdf.gz
Access statistics for this paper at LogEc which is a part of the RePEc project as was/is EconWPA.
Translate to another language with babel.altavista.com EconWPA reference ewp-fin/9808004
RePEc reference RePEc:wpa:wuwpfi:9808004 send e-mail to

EconWPA began as a conversation between Bob Parks and Larry Blume on January 28, 1993. I located Paul Ginsparg's archive (then xxx.lanl.gov) and he graciously installed his software on a Sun Sparc system which was supporting the department of economics email and computation. EconWPA began accepting papers July 1, 1993 and had ftp, email, gopher and web interfaces. The web interface for submissions was engineered into existence in July 1995. A complete and catastrophic machine failure in 1999 caused the loss of EconWPA's email new paper announcment service at which time there were over 15,000 subscriptions with over 8,000 unique email addresses.

In 2005, Arts and Sciences commandeered the computing services that I had provided to the Department of Economics since 1987. Some might say that the department was sold out, others would (erroneously) claim that centralization is efficient, and still others would claim that I have few marketing skills.

I was told that I could keep operating EconWPA (as well as many other services including rfe.wustl.edu, barnett.wustl.edu, and three RePEc servers) but I would receive no support (hardware, software, or anthing else) and (as had been the case) no compensation. At that point, given the apparent low valuation of my activities by the department, and university, it made no sense for me to continue operating EconWPA or other services.

Thanks to all who have supported EconWPA in the past.

A Chinese curse states May you live in intersting times. I have. Bob Parks - Jan 2006