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Indirect Robust Estimation of the Short-Term Interest Rate Process

Author

Listed:
  • Veronika Czellar

    (UNIGE - Université de Genève = University of Geneva)

  • G. Andrew Karolyi

    (OSU - The Ohio State University [Columbus])

  • Elvezio Ronchetti

    (UNIGE - Université de Genève = University of Geneva)

Abstract

We propose Indirect Robust Generalized Method of Moments (IRGMM), a simulation-based estimation methodology, to model short-term interest rate processes. The primary advantage of IRGMM relative to classical estimators of the continuous-time short-rate diffusion processes is that it corrects both the errors due to discretization and the errors due to model misspecification. We apply this approach to monthly US risk free rates and to various monthly Eurocurrency rates and provide extensive evidence of its predictive performances in a variety of settings.

Suggested Citation

  • Veronika Czellar & G. Andrew Karolyi & Elvezio Ronchetti, 2007. "Indirect Robust Estimation of the Short-Term Interest Rate Process," Post-Print hal-02313232, HAL.
    • Handle: RePEc:hal:journl:hal-02313232
    DOI: 10.1016/j.jempfin.2006.09.004
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    Citations

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    Cited by:

    1. Peter Fuleky, 2012. "On the choice of the unit period in time series models," Applied Economics Letters, Taylor & Francis Journals, vol. 19(12), pages 1179-1182, August.
    2. Cizek, P., 2009. "Generalized Methods of Trimmed Moments," Discussion Paper 2009-25, Tilburg University, Center for Economic Research.
    3. Hong, Yongmiao & Lin, Hai & Wang, Shouyang, 2010. "Modeling the dynamics of Chinese spot interest rates," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 1047-1061, May.
    4. Hou, Ai Jun & Suardi, Sandy, 2011. "Modelling and forecasting short-term interest rate volatility: A semiparametric approach," Journal of Empirical Finance, Elsevier, vol. 18(4), pages 692-710, September.
    5. Rama Cont & Romain Deguest & Giacomo Scandolo, 2010. "Robustness and sensitivity analysis of risk measurement procedures," Quantitative Finance, Taylor & Francis Journals, vol. 10(6), pages 593-606.
    6. Nowman, Khalid Ben, 2010. "Modelling the UK and Euro yield curves using the Generalized Vasicek model: Empirical results from panel data for one and two factor models," International Review of Financial Analysis, Elsevier, vol. 19(5), pages 334-341, December.
    7. Christiansen, Charlotte, 2008. "Level-ARCH short rate models with regime switching: Bivariate modeling of US and European short rates," International Review of Financial Analysis, Elsevier, vol. 17(5), pages 925-948, December.
    8. Al-Zoubi, Haitham A., 2019. "Bond and option prices with permanent shocks," Journal of Empirical Finance, Elsevier, vol. 53(C), pages 272-290.
    9. Loisel, Sébastien & Takane, Marina, 2009. "Fast indirect robust generalized method of moments," Computational Statistics & Data Analysis, Elsevier, vol. 53(10), pages 3571-3579, August.
    10. Emma M. Iglesias & Garry D. A. Phillips, 2020. "Further Results on Pseudo‐Maximum Likelihood Estimation and Testing in the Constant Elasticity of Variance Continuous Time Model," Journal of Time Series Analysis, Wiley Blackwell, vol. 41(2), pages 357-364, March.
    11. Asimit, Alexandru V. & Badescu, Alexandru M. & Verdonck, Tim, 2013. "Optimal risk transfer under quantile-based risk measurers," Insurance: Mathematics and Economics, Elsevier, vol. 53(1), pages 252-265.
    12. Zuzana Buckova & Beata Stehlikova & Daniel Sevcovic, 2016. "Numerical and analytical methods for bond pricing in short rate convergence models of interest rates," Papers 1607.04968, arXiv.org.
    13. Otunuga Olusegun M. & Ladde Gangaram S. & Ladde Nathan G., 2019. "Local Lagged Adapted Generalized Method of Moments: An Innovative Estimation and Forecasting Approach and its Applications," Journal of Time Series Econometrics, De Gruyter, vol. 11(1), pages 1-72, January.
    14. Alperovych, Yan & Cumming, Douglas & Czellar, Veronika & Groh, Alexander, 2021. "M&A rumors about unlisted firms," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1324-1339.
    15. Laurini, Márcio Poletti & Hotta, Luiz Koodi, 2013. "Indirect Inference in fractional short-term interest rate diffusions," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 94(C), pages 109-126.

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