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Bayesian testing for short term interest rate models

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Listed:
  • Zhang, Yonghui
  • Chen, Zhongtian
  • Li, Yong

Abstract

In empirical finance, interest rate models have been widely used for modeling short-term interest rate. Under the framework of the hypothesis testing, this paper provides a Bayesian approach for comparing a range of alternative models. These compared models are nested in a general single-factor diffusion process for the short-term interest rate, with each alternative model indexed by the level effect parameter for the volatility. The performance of the developed procedure is illustrated by an empirical example of Eurodollar deposit rates.

Suggested Citation

  • Zhang, Yonghui & Chen, Zhongtian & Li, Yong, 2017. "Bayesian testing for short term interest rate models," Finance Research Letters, Elsevier, vol. 20(C), pages 146-152.
    • Handle: RePEc:eee:finlet:v:20:y:2017:i:c:p:146-152
    DOI: 10.1016/j.frl.2016.09.020
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    References listed on IDEAS

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    More about this item

    Keywords

    Bayes factor; χ2 test; Markov Chain Monte Carlo (MCMC); Short-term interest rate models; Hypothesis testing;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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