archive of the former site EconWPA.wustl.edu

Please do not link or reference this page. Use one of the following URLs:
econpapers.repec.org as http://econpapers.repec.org/paper/wpawuwpfi/9808005.htm
ideas.repec.org as http://ideas.repec.org/p/wpa/wuwpfi/9808005.html

Is the Short Rate Drift Actually Nonlinear?

Paper:ewp-fin/9808005
From:    
Date: Fri, 28 Aug 1998 13:02:50 -0500

Title: Is the Short Rate Drift Actually Nonlinear?
Author: David A. Chapman (The University of Texas at Austin) and Neil D. Pearson (The Univerisity of Illinois at Urbana-Champaign)
Contact:
Comments: Type of Document - pdf; prepared on pc; to print on unknown; pages: 56; figures: included . Office for Futures and Options Research (OFOR) at the University of Illinois at Urbana-Champaign. Working Paper 98-07. For a complete list of OFOR working papers see http://w3.ag.uiuc.edu/ACE/ofor
Keywords: term structure, continuous-time
JEL: G1
EWPA-references:
Report-no: OFOR-98-07

Abstract:

Virtually all existing continuous-time, single-factor term structure models are based on a short rate process that has a linear drift function. However, there is no strong a priori argument in favor of linearity, and Stanton (1997) and Ait-Sahalia (1996) employ nonparametric estimation techniques to conclude that the drift function of the short rate contains important nonlinearities. Comparatively little is known about the finite-sample properties of these estimators, particularly when they are applied to frequent sampling of a very persistent process, like short term interest rates. In this paper, we apply these estimators to simulated sample paths of a square-root diffusion. Although the drift function is linear, both estimators suggest nonlinearities of the type and magnitude reported in by Stanton (1997) and Ait-Sahalia (1996). These results, along with the results of a simple GMM estimation procedure applied to the Stanton and Ait-Sahalia data sets, imply that nonlinearity of the short rate drift is not a robust stylized fact.

Acrobat pdf files:(viewing .pdf) archive: 9808005.pdf is 1292024 bytes, 7-28-98, or 9808005.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/9808005
RePEc reference RePEc:wpa:wuwpfi:9808005 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