The Discretization Bias for Processes of the Short-Term Interest Rate: An Empirical Analysis

Rudy De Winne

No 1995064, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: This paper compares difference continuous-time specifications for the short-term interest rate dynamics on five European markets. We propose a general specification which encompasses nine well-known processes of the financial literature. A classical estimation of the parameters leads us to the choice of simple models like the Ornstein-Uhlenbeck process of Vasicek (1977) or the “Square Root” process of Cox, Ingersoll and Ross (1985). Then we focus on the discretization bias and a methodology to correct it is proposed. The results confirm the existence of a discretization bias. Finally, we show that this simulation-based methodology can be applied to the estimation of the parameters of correlated diffusion processes.

Date: 1995-11-01
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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvco:1995064

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