On the robustness of short-term interest rate models

Authors: Treepongkaruna, Sirimon¹; Gray, Stephen²

Source: Accounting and Finance, Volume 43, Number 1, March 2003 , pp. 87-121(35)

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Abstract:

This paper investigates the robustness of a range of short-term interest rate models. We examine the robustness of these models over different data sets, time periods, sampling frequencies, and estimation techniques. We examine a range of popular one-factor models that allow the conditional mean (drift) and conditional variance (diffusion) to be functions of the current short rate. We find that parameter estimates are highly sensitive to all of these factors in the eight countries that we examine. Since parameter estimates are not robust, these models should be used with caution in practice.

Keywords: short-term interest rates; mean reversion; conditional volatility

Document Type: Research article

DOI: http://dx.doi.org/10.1111/1467-629X.00084

Affiliations: 1: Australian National University, Canberra, 2: University of Queensland, Australia and Duke University, USA

Publication date: 2003-03-01