 Using Proxies for the Short Rate: When Are Three Months Like an Instant?David Chapman (), Long, John B, and Neil Pearson () The Review of Financial Studies, 1999, vol. 12, issue 4, 763-806 Abstract: The dynamics of the unobservable short rate are frequently estimated directly using a proxy. We examine the biases resulting from this practice (the 'proxy problem'). Analytic results show that the proxy problem is not economically significant for single-factor affine models. In the two-factor affine model of Longstaff and Schwartz (1992), the proxy problem is only economically significant for pricing discount bonds with maturities of more than five years. We also describe two different numerical procedures for assessing the magnitude of the proxy problem in a general interest rate model. When applied to a nonlinear single-factor model, they suggest that the proxy problem can be economically significant. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies. Date: 1999 There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:oup:rfinst:v:12:y:1999:i:4:p:763-806 Ordering information: This journal article can be ordered from Access Statistics for this article The Review of Financial Studies is currently edited by Itay Goldstein More articles in The Review of Financial Studies from Society for Financial Studies Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.. Contact information at EDIRC. |
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