Nonlinear Drift And Stochastic Volatility: An Empirical Investigation Of Short‐Term Interest Rate Models

Licheng Sun

Journal of Financial Research, 2003, vol. 26, issue 3, 389-404

Abstract: In this article I provide new evidence on the role of nonlinear drift and stochastic volatility in interest rate modeling. I compare various model specifications for the short‐term interest rate using the data from five countries. I find that modeling the stochastic volatility in the short rate is far more important than specifying the shape of the drift function. The empirical support for nonlinear drift is weak with or without the stochastic volatility factor. Although a linear drift stochastic volatility model fits the international data well, I find that the level effect differs across countries.

Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfnres:v:26:y:2003:i:3:p:389-404

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