Author: Ramaprasad Bhar Publisher: ISBN: Category : Languages : en Pages : 44
Book Description
This paper compares the performance of three maximum likelihood estimation procedures -quasi-maximum likelihood, Monte Carlo likelihood and the particle filter to estimate stochastic volatility models of short term interest rates. The procedures are compared in an empirical study of interest rate volatility where a number of diagnostic tests in- and out-of-sample are utilized to evaluate both model specification and estimation procedure. Empirically, the results suggest interest rates follow the Cox-Ingersoll-Ross model with stochastic volatility and that volatility increases after Federal Open Market Committee meetings. Overall, the Monte Carlo likelihood procedure provided the best results.
Author: Mr.Vadim Khramov Publisher: International Monetary Fund ISBN: 1475591225 Category : Business & Economics Languages : en Pages : 27
Book Description
This paper sheds light on a narrow but crucial question in finance: What should be the parameters of a model of the short-term real interest rate? Although models for the nominal interest rate are well studied and estimated, dynamics of the real interest rate are rarely explored. Simple ad hoc processes for the short-term real interest rate are usually assumed as building blocks for more sophisticated models. In this paper, parameters of the real interest rate model are estimated in the broad class of single-factor interest rate diffusion processes on U.S. monthly data. It is shown that the elasticity of interest rate volatility—the relationship between the volatility of changes in the interest rate and its level—plays a crucial role in explaining real interest rate dynamics. The empirical estimates of the elasticity of the real interest rate volatility are found to be about 0.5, much lower than that of the nominal interest rate. These estimates show that the square root process, as in the Cox-Ingersoll-Ross model, provides a good characterization of the short-term real interest rate process.
Author: Mona Ben Salah Publisher: ISBN: Category : Languages : en Pages : 12
Book Description
This article attempts to identify the best model of the short term interest rates that can predict its stochastic process over time. We studied nine different models of the short term interest rates. The choice of these models was the aim of analyzing the relevance of certain specifications of the the short term interest rate stochastic process, the effect of mean reversion and the sensitivity of the volatility to the level of interest rate.The yield on US three months treasury bills is used as a proxy for the short term interest rates. The parameters of the different stochastic process are estimated using the generalized method of moments. The results show that the effect of mean reversion is not statistically significant and that volatility is highly sensitive to the level of interest rates. To further study the performance prediction of the intertemporal behavior of the short term interest rate of the various models; we simulated their stochastic process for different periods.The results show that none of the studied models reproduce the actual path of the short term interest rates. The problem lies in the parametric specification of the mean and volatility of the diffusion process To further study the accurate parametric specification of the interest rate stochastic process we use a nonparametric estimation of the drift and the diffusion functions. The results prove that both should be nonlinear.
Author: Madhu Kalimipalli Publisher: ISBN: Category : Languages : en Pages :
Book Description
In this paper, we introduce regime-switching in a two-factor stochastic volatility (SV) model to explain the behavior of short-term interest rates. We model the volatility of short-term interest rates as a stochastic volatility process whose mean is subject to shifts in regime. We estimate the regime-switching stochastic volatility (RSV) model using a Gibbs Sampling-based Markov Chain Monte Carlo algorithm. In-sample results strongly favor the RSV model in comparison to the single-state SV model and GARCH family of models. Out-of-sample results are mixedand, overall, provide weak support for the RSV model.
Author: Jaya P. N. Bishwal Publisher: Springer Nature ISBN: 3031038614 Category : Mathematics Languages : en Pages : 634
Book Description
This book develops alternative methods to estimate the unknown parameters in stochastic volatility models, offering a new approach to test model accuracy. While there is ample research to document stochastic differential equation models driven by Brownian motion based on discrete observations of the underlying diffusion process, these traditional methods often fail to estimate the unknown parameters in the unobserved volatility processes. This text studies the second order rate of weak convergence to normality to obtain refined inference results like confidence interval, as well as nontraditional continuous time stochastic volatility models driven by fractional Levy processes. By incorporating jumps and long memory into the volatility process, these new methods will help better predict option pricing and stock market crash risk. Some simulation algorithms for numerical experiments are provided.
Author: Xin Bo Publisher: ISBN: Category : Interest rates Languages : en Pages : 0
Book Description
The paper proposes a procedure for testing the alternative continuous time models of short term riskless interest rates. Parameters estimation and models comparison are presented using the Generalized Method of Moments. An empirical research to LIBOR in US dollar is given and found that the volatility of interest rate changes is to be less sensitive to the interest rate levels in contrast to previous findings. In addition the Brennan-Schwartz model is suggested to be superior to the others in term of data fit under daily observations, and CIR SR model cannot be rejected.
Author: Xin Bo Publisher: ISBN: Category : Interest rates Languages : en Pages : 54
Book Description
The paper proposes a procedure for testing the alternative continuous time models of short term riskless interest rates. Parameters estimation and models comparison are presented using the Generalized Method of Moments. An empirical research to LIBOR in US dollar is given and found that the volatility of interest rate changes is to be less sensitive to the interest rate levels in contrast to previous findings. In addition the Brennan-Schwartz model is suggested to be superior to the others in term of data fit under daily observations, and CIR SR model cannot be rejected.
Author: Turan G. Bali Publisher: ISBN: Category : Languages : en Pages :
Book Description
I introduce two-factor discrete time stochastic volatility models of the short-term interest rate to compare the relative performance of existing and alternative empirical specifications. I develop a nonlinear asymmetric framework that allows for comparisons of non-nested models featuring conditional heteroskedasticity and sensitivity of the volatility process to interest rate levels. A new class of stochastic volatility models with asymmetric drift and nonlinear asymmetric diffusion process is introduced in discrete time and tested against the popular continuous time and symmetric and asymmetric GARCH models. The existing models are rejected in favor of the newly proposed models because of the asymmetric drift of the short rate, and the presence of nonlinearity, asymmetry, GARCH, and level effects in its volatility. I test the predictive power of nested and non-nested models in capturing the stochastic behavior of the risk-free rate. Empirical evidence on three-, six-, and 12-month U.S. Treasury bills indicates that two-factor stochastic volatility models are better than diffusion and GARCH models in forecasting the future level and volatility of interest rate changes.
Author: Mona Ben Salah Publisher: ISBN: Category : Languages : en Pages : 11
Book Description
This article attempts to identify the best model of the short term interest rates that can predict its stochastic process over time.We studied eight different models of interest rates in the short term. The choice of these models was the aim of analyzing the relevance of certain specifications of the stochastic process of the short term interest rates, the effect of mean reversion and the sensitivity of the volatility to the level of interest rate.The yield on three months treasury bills is used as a proxy for the short term interest rates. The parameters of the different stochastic process are estimated using the generalized method of moments. The results show that the effect of mean reversion is not statistically significant and that volatility is highly sensitive to the level of interest rates.To further study the performance prediction of the intertemporal behavior of the short term interest rate of the various models; we simulated their stochastic process for different periods.The results show that none of the studied models reproduce the actual path of the short term interest rates. The problem lies in the parametric specification of the mean and volatility of the diffusion process.
Author: Ramaprasad Bhar
Author: Mr.Vadim Khramov
Author: Mona Ben Salah
Author: Madhu Kalimipalli
Author: Jaya P. N. Bishwal
Author: Clifford A. Ball
Author: Xin Bo
Author: Xin Bo
Author: Turan G. Bali
Author: Mona Ben Salah