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On the Specification of the Drift and Diffusion Functions for Continuous‐time Models of the Spot Interest Rate *
Author(s) -
Hurn A. S.,
Lindsay K. A.
Publication year - 2002
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/1468-0084.00277
Subject(s) - interest rate , function (biology) , econometrics , mathematics , economics , finance , evolutionary biology , biology
his paper explores the specification of drift and diffusion functions for continuous-time short-term interest rate models. Various forms for the drift and diffusion of 7-day Eurodollar rates are proposed and then estimated by discrete maximum-likelihood. The results suggest that a nonparametric specification of drift and volatility in terms of orthogonal polynomial expansions is effective in eliminating problems of parameter identification encountered previously. Some evidence is found to support the claim that the drift of the short term interest rate is nonlinear