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A comparison of short-term interest rate models: empirical tests of interest rate volatility

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  • Mikiyo Kii Niizeki

Abstract

This paper investigates short-term interest rate models using daily data for both the US and Japan over the five years October 1989 to January 1994. A nonparametric method is used to estimate the volatility of the short-term interest rate and the results are compared with those from a parametric method. Three important features are found. First, a two-factor model can capture the behaviour of the interest rate better than a one-factor model. Second, although the US interest rate does not exhibit the mean reverting property, the Japanese interest rate does. Third, in contrast to the Japanese interest rate, the conditional variance of US interest rate changes is found to depend on the level of the interest rate.

Suggested Citation

  • Mikiyo Kii Niizeki, 1998. "A comparison of short-term interest rate models: empirical tests of interest rate volatility," Applied Financial Economics, Taylor & Francis Journals, vol. 8(5), pages 505-512.
    • Handle: RePEc:taf:apfiec:v:8:y:1998:i:5:p:505-512
    DOI: 10.1080/096031098332808
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    References listed on IDEAS

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    1. Robert F. Engle & Alex Kane & Jaesun Noh, 1993. "Index-Option Pricing with Stochastic Volatility and the Value of Accurate Variance Forecasts," NBER Working Papers 4519, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Antonio Mele, 2003. "Fundamental Properties of Bond Prices in Models of the Short-Term Rate," The Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 679-716, July.
    2. Muteba Mwamba, John & Thabo, Lethaba & Uwilingiye, Josine, 2014. "Modelling the short-term interest rate with stochastic differential equation in continuous time: linear and nonlinear models," MPRA Paper 64386, University Library of Munich, Germany.
    3. Mr. Armando Méndez Morales & Miss Liliana B Schumacher, 2003. "Market Volatility As a Financial Soundness Indicator: An Application to Israel," IMF Working Papers 2003/047, International Monetary Fund.
    4. Anil Kumar, 2006. "Nonparametric conditional density estimation of labour force participation," Applied Economics Letters, Taylor & Francis Journals, vol. 13(13), pages 835-841.
    5. Nowman, K. Ben & Saltoglu, Burak, 2003. "Continuous time and nonparametric modelling of U.S. interest rate models," International Review of Financial Analysis, Elsevier, vol. 12(1), pages 25-34.

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