Bayesian testing for short term interest rate models

Yonghui Zhang, Zhongtian Chen and Yong Li

Finance Research Letters, 2017, vol. 20, issue C, 146-152

Abstract: In empirical finance, interest rate models have been widely used for modeling short-term interest rate. Under the framework of the hypothesis testing, this paper provides a Bayesian approach for comparing a range of alternative models. These compared models are nested in a general single-factor diffusion process for the short-term interest rate, with each alternative model indexed by the level effect parameter for the volatility. The performance of the developed procedure is illustrated by an empirical example of Eurodollar deposit rates.

Keywords: Bayes factor; χ2 test; Markov Chain Monte Carlo (MCMC); Short-term interest rate models; Hypothesis testing (search for similar items in EconPapers)
JEL-codes: C11 C12 G12 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:20:y:2017:i:c:p:146-152

DOI: 10.1016/j.frl.2016.09.020

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