Are there non-linearities in short-term interest rates?

Treepongkaruna, S. and Gray, S. F. (2006) Are there non-linearities in short-term interest rates?. Accounting and Finance, 46 1: 149-167.

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Author Treepongkaruna, S.
Gray, S. F.
Title Are there non-linearities in short-term interest rates?
Journal name Accounting and Finance  (ERA 2012 Listed)    (ERA 2010 Rank B)   Check publisher's open access policy
Publication date 2006
Sub-type Article
DOI 10.1111/j.1467-629X.2006.00151.x
Volume number 46
Issue number 1
ISSN 0810-5391
Start page 149
End page 167
Total pages 19
Editor R. Faff
Place of publication Australia
Publisher Blackwell
Collection year 2006
Subject C1
350301 Finance
720199 Macroeconomic issues not elsewhere classified
Abstract The present paper investigates the characteristics of short-term interest rates in several countries. We examine the importance of nonlinearities in the mean reversion and volatility of short-term interest rates. We examine various models that allow the conditional mean (drift) and conditional variance (diffusion) to be functions of the current short rate.We find that different markets require different models. In particular, we find evidence of nonlinear mean reversion in some of the countries that we examine, linear mean reversion in others and no mean reversion in some countries. For all countries we examine, there is strong evidence of the need for the volatility of interest rate changes to be highly sensitive to the level of the short-term interest rate. Out-of-sample forecasting performance of one-factor short rate models is poor, stemming from the inability of the models to accommodate jumps and discontinuities in the time series data.
Keyword Short-term interest rates
Mean reversion
Conditional volatility
Q-Index Code C1
Q-Index Status Provisional Code
Institutional Status UQ

 
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Created: Wed, 15 Aug 2007, 06:43:25 EST