ESTIMATES OF THE SHORT-TERM RATE PROCESS IN AN ARBITRAGE-FREE FRAMEWORK

Hossein Kazemi (), Mahnaz Mahdavi () and Brett Salazar ()
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Hossein Kazemi: Isenberg School of Management, University of Massachusetts, Amherst, MA 01003, USA
Mahnaz Mahdavi: Department of Economics, Smith College, Amherst, MA 01063, USA
Brett Salazar: Goldman Sachs & Co., 85 Broad Street New York, NY 10004, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2004, vol. 07, issue 05, 577-589

Abstract: This paper uses a new restriction imposed by the no-arbitrage condition on interest rate processes to estimate the parameters of the short-term rates for US, France, UK and Germany. A general process that nests almost all previous one-factor models is estimated. The results show that the volatility structure of US short-term rate is similar to the processes suggested by Duffie and Kahn [9] or Chanet al.[4] depending on the proxy used for the short-term rate and the time period covered by the study. The volatility structures of the short-term rates in France and Germany do not have constant elasticity with respect to the short-term rate, while the elasticity of UK's short-term rate is constant and equal to 1.5.

Keywords: Interest rates; volatility; risk premium; arbitrage; forward rate (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S0219024904002566

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