Evaluating Structural Models for the U.S. Short Rate Using EMM and Particle Filters

Drew Creal, Ying Gu and Eric Zivot

No UWEC-2006-18, Working Papers from University of Washington, Department of Economics

Abstract: We combine the efficient method of moments with appropriate algorithms from the optimal filtering literature to study a collection of models for the U.S. short rate. Our models include two continuous-time stochastic volatility models and two regime switching models, which provided the best fit in previous work that examined a large collection of models. The continuous-time stochastic volatility models fall into the class of nonlinear, non-Gaussian state space models for which we apply particle filtering and smoothing algorithms. Our results demonstrate the effectiveness of the particle filter for continuous-time processes. Our analysis also provides an alternative and complementary approach to the reprojection technique of Gallant and Tauchen (1998) for studying the dynamics of volatility.

Date: 2006-08
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Persistent link: https://EconPapers.repec.org/RePEc:udb:wpaper:uwec-2006-18

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