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Short-Term Interest Rate Model: Calibration of the Vasicek Process to Ghana’s Treasury Rate

Emmanuel Thompson, Gideon Mensah Engmann and Austin Butorac

Journal of Finance and Investment Analysis, 2016, vol. 5, issue 1, 4

Abstract: This paper calibrates model parameters of the Vasicek process to Ghana’s Treasury bill rate. The calibration was done by both the methods of least squares and maximum likelihood. The key objective is to propose a simple but an appropriate short-term interest rate model that could be used to value any security that depends on Ghana’s Treasury bill rate. The 91 day Treasury bill rate dataset from January 1988 to June 2015 were used. A major finding of the study was that, the method of maximum likelihood resulted in a much lower estimate for the volatility as compared to the method of least squares. Vasicek model is one member of the family of one-factor short-term interest rate models. Future research needs to compare the Vasicek to other members of the family.

Date: 2016
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Handle: RePEc:spt:fininv:v:5:y:2016:i:1:f:5_1_4