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Estimates Of The Short-Term Rate Process In An Arbitrage-Free Framework

Author

Listed:
  • HOSSEIN KAZEMI

    (Isenberg School of Management, University of Massachusetts, Amherst, MA 01003, USA)

  • MAHNAZ MAHDAVI

    (Department of Economics, Smith College, Amherst, MA 01063, USA)

  • BRETT SALAZAR

    (Goldman Sachs & Co., 85 Broad Street New York, NY 10004, USA)

Abstract

This paper uses a new restriction imposed by the no-arbitrage condition on interest rate processes to estimate the parameters of the short-term rates for US, France, UK and Germany. A general process that nests almost all previous one-factor models is estimated. The results show that the volatility structure of US short-term rate is similar to the processes suggested by Duffie and Kahn [9] or Chanet al.[4] depending on the proxy used for the short-term rate and the time period covered by the study. The volatility structures of the short-term rates in France and Germany do not have constant elasticity with respect to the short-term rate, while the elasticity of UK's short-term rate is constant and equal to 1.5.

Suggested Citation

  • Hossein Kazemi & Mahnaz Mahdavi & Brett Salazar, 2004. "Estimates Of The Short-Term Rate Process In An Arbitrage-Free Framework," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 7(05), pages 577-589.
    • Handle: RePEc:wsi:ijtafx:v:07:y:2004:i:05:n:s0219024904002566
    DOI: 10.1142/S0219024904002566
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    Cited by:

    1. Mahdavi, Mahnaz, 2008. "A comparison of international short-term rates under no arbitrage condition," Global Finance Journal, Elsevier, vol. 18(3), pages 303-318.

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