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Nonlinear asymmetric models of the short‐term interest rate

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  • K. Ozgur Demirtas

Abstract

This study introduces a generalized discrete time framework to evaluate the empirical performance of a wide variety of well‐known models in capturing the dynamic behavior of short‐term interest rates. A new class of models that displays nonlinearity and asymmetry in the drift, and incorporates the level effect and stochastic volatility in the diffusion function is introduced in discrete time and tested against the popular diffusion, GARCH, and level‐GARCH models. Based on the statistical test results, the existing models are strongly rejected in favor of the newly proposed models because of the nonlinear asymmetric drift of the short rate, and the presence of nonlinearity, GARCH, and level effects in its volatility. The empirical results indicate that the nonlinear asymmetric models are better than the existing models in forecasting the future level and volatility of interest rate changes. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:869–894, 2006

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  • K. Ozgur Demirtas, 2006. "Nonlinear asymmetric models of the short‐term interest rate," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 26(9), pages 869-894, September.
    • Handle: RePEc:wly:jfutmk:v:26:y:2006:i:9:p:869-894
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    Cited by:

    1. Li, Liuling & Mizrach, Bruce, 2010. "Tail return analysis of Bear Stearns' credit default swaps," Economic Modelling, Elsevier, vol. 27(6), pages 1529-1536, November.
    2. Saten Kumar, 2016. "Is the US Consumer Credit Asymmetric?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 63(2), pages 194-215, May.

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