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Modelling the short-term interest rate with stochastic differential equation in continuous time: linear and nonlinear models

Author

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  • Muteba Mwamba, John
  • Thabo, Lethaba
  • Uwilingiye, Josine

Abstract

Recently, financial engineering has brought a significant number of interest rate derivative products. Amongst the variables used in pricing these derivative products is the short-term interest rate. This research article examines various short-term interest rate models in continuous time in order to determine which model best fits the South African short-term interest rates. Both the linear and nonlinear short-term interest rate models were estimated. The methodology adopted in estimating the models was parametric approach using Quasi Maximum Likelihood Estimation (QMLE). The findings indicate that nonlinear models seem to fit the South African short-term interest rate data better than the linear models

Suggested Citation

  • 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.
    • Handle: RePEc:pra:mprapa:64386
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    References listed on IDEAS

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    More about this item

    Keywords

    stochastic differential equation; short interest rate; continuous time modeling;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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