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Short-term interest rate models and generation of interest rate scenarios

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  • Tse, Y.K.

Abstract

This paper investigates the stochastic behaviour of the short-term interest rates. The lognormal model, the stable Paretian model and the continuous time mean reversion model are considered. The parameters of the models are estimated using 17 years of weekly data. Our results show that the lognormal and the stable Paretian models are likely to give rise to unreasonably large interest rate values even for horizon of five years. In comparison, the mean reversion model appears to provide more realistic results than the other two models.

Suggested Citation

  • Tse, Y.K., 1997. "Short-term interest rate models and generation of interest rate scenarios," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 43(3), pages 475-480.
    • Handle: RePEc:eee:matcom:v:43:y:1997:i:3:p:475-480
    DOI: 10.1016/S0378-4754(97)00034-7
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    References listed on IDEAS

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