TY - JOUR
AU - Ait-Sahalia,Yacine
TI - Testing Continuous-Time Models of the Spot Interest Rate
JF - National Bureau of Economic Research Working Paper Series
VL - No. 5346
PY - 1995
Y2 - November 1995
UR - http://www.nber.org/papers/w5346
L1 - http://www.nber.org/papers/w5346.pdf
N1 - Author contact info:
Yacine Aït-Sahalia
Department of Economics
Bendheim Center for Finance
Princeton University
Princeton, NJ 08540
Tel: 609/258-4015
Fax: 609/258-0719
E-Mail: yacine@princeton.edu
AB - Different continuous-time models for interest rates coexist in the literature. We test parametric models by comparing their implied parametric density to the same density estimated nonparametrically. We do not replace the continuous-time model by discrete approximations, even though the data are recorded at discrete intervals. The principal source of rejection of existing models is the strong nonlinearity of the drift. Around its mean, where the drift is essentially zero, the spot rate behaves like a random walk. The drift then mean-reverts strongly when far away from the mean. The volatility is higher when away from the mean.
ER -