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An empirical comparison of alternative models of the shortterm interest rate
 Journal of Finance
, 1992
"... prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, noncommercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtai ..."
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Cited by 307 (2 self)
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prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, noncommercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at
A Nonparametric Model of Term Structure Dynamics and the Market Price of Interest Rate Risk
, 1997
"... This article presents a technique for nonparametrically estimating continuoustime di#usion processes which are observed at discrete intervals. We illustrate the methodology by using daily three and six month Treasury Bill data, from January 1965 to July 1995, to estimate the drift and di#usion of t ..."
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Cited by 124 (5 self)
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This article presents a technique for nonparametrically estimating continuoustime di#usion processes which are observed at discrete intervals. We illustrate the methodology by using daily three and six month Treasury Bill data, from January 1965 to July 1995, to estimate the drift and di#usion of the short rate, and the market price of interest rate risk. While the estimated di#usion is similar to that estimated by Chan, Karolyi, Longsta# and Sanders (1992), there is evidence of substantial nonlinearity in the drift. This is close to zero for low and medium interest rates, but mean reversion increases sharply at higher interest rates.
Measuring Default Risk Premia from Default Swap Rates and EDFs
, 2004
"... This paper estimates recent default risk premia for U.S. corporate debt, based on a close relationship between default probabilities, as estimated by Moody's KMV EDFs, and default swap (CDS) market rates. The defaultswap data, obtained through CIBC from 22 banks and specialty dealers, allow us ..."
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Cited by 94 (7 self)
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This paper estimates recent default risk premia for U.S. corporate debt, based on a close relationship between default probabilities, as estimated by Moody's KMV EDFs, and default swap (CDS) market rates. The defaultswap data, obtained through CIBC from 22 banks and specialty dealers, allow us to establish a strong link between actual and riskneutral default probabilities for the 69 firms in the three sectors that we analyze: broadcasting and entertainment, healthcare, and oil and gas. We find dramatic variation over time in risk premia, from peaks in the thrid quarter of 2002, dropping by roughly 50% to late 2003.
Is the Short Rate Drift Actually Nonlinear?
, 1999
"... AitSahalia (1996) and Stanton (1997) use nonparametric estimators applied to short term interest rate data to conclude that the drift function contains important nonlinearities. We study the finitesample properties of their estimators by applying them to simulated sample paths of a squareroot dif ..."
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Cited by 48 (1 self)
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AitSahalia (1996) and Stanton (1997) use nonparametric estimators applied to short term interest rate data to conclude that the drift function contains important nonlinearities. We study the finitesample properties of their estimators by applying them to simulated sample paths of a squareroot diffusion. Although the drift function is linear, both estimators suggest nonlinearities of the type and magnitude reported in AitSahalia (1996) and Stanton (1997). Combined with the results of a weighted least squares estimator, this evidence implies that nonlinearity of the short rate drift is not a robust stylized fact.
Term structure dynamics in theory and reality
 Review of Financial Studies
, 2003
"... This paper is a critical survey of models designed for pricing fixed income securities and their associated term structures of market yields. Our primary focus is on the interplay between the theoretical specification of dynamic term structure models and their empirical fit to historical changes in ..."
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Cited by 46 (8 self)
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This paper is a critical survey of models designed for pricing fixed income securities and their associated term structures of market yields. Our primary focus is on the interplay between the theoretical specification of dynamic term structure models and their empirical fit to historical changes in the shapes of yield curves. We begin by overviewing the dynamic term structure models that have been fit to treasury or swap yield curves and in which the risk factors follow diffusions, jumpdiffusion, or have “switching regimes. ” Then the goodnessoffits of these models are assessed relative to their abilities to: (i) match linear projections of changes in yields onto the slope of the yield curve; (ii) match the persistence of conditional volatilities, and the shapes of term structures of unconditional volatilities, of yields; and (iii) to reliably price caps, swaptions, and other fixedincome derivatives. For the case of defaultable securities we explore the relative fits to historical yield spreads. 1
A selective overview of nonparametric methods in financial econometrics
 Statist. Sci
, 2005
"... Abstract. This paper gives a brief overview of the nonparametric techniques that are useful for financial econometric problems. The problems include estimation and inference for instantaneous returns and volatility functions of timehomogeneous and timedependent diffusion processes, and estimation ..."
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Cited by 34 (7 self)
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Abstract. This paper gives a brief overview of the nonparametric techniques that are useful for financial econometric problems. The problems include estimation and inference for instantaneous returns and volatility functions of timehomogeneous and timedependent diffusion processes, and estimation of transition densities and state price densities. We first briefly describe the problems and then outline the main techniques and main results. Some useful probabilistic aspects of diffusion processes are also briefly summarized to facilitate our presentation and applications.
Continuoustime methods in finance: A review and an assessment
 Journal of Finance
, 2000
"... I survey and assess the development of continuoustime methods in finance during the last 30 years. The subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing, term structure theory, asset pricing, and optimal consumption and portfolio choices. ..."
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Cited by 32 (0 self)
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I survey and assess the development of continuoustime methods in finance during the last 30 years. The subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing, term structure theory, asset pricing, and optimal consumption and portfolio choices. During the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance. This latter subperiod has seen significant progress in econometric theory, computational and estimation methods to test and implement continuoustime models. Capital market frictions and bargaining issues are being increasingly incorporated in continuoustime theory. THE ROOTS OF MODERN CONTINUOUSTIME METHODS in finance can be traced back to the seminal contributions of Merton ~1969, 1971, 1973b! in the late 1960s and early 1970s. Merton ~1969! pioneered the use of continuoustime modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting.
On The Stability Of LogNormal Interest Rate Models And The Pricing Of Eurodollar Futures
, 1995
"... . The lognormal distribution assumption for the term structure of interest is the most natural way to exclude negative spot and forward rates. However, imposing this assumption on the continuously compounded interest rate has a serious drawback: expected rollover returns are infinite even if the rol ..."
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Cited by 29 (1 self)
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. The lognormal distribution assumption for the term structure of interest is the most natural way to exclude negative spot and forward rates. However, imposing this assumption on the continuously compounded interest rate has a serious drawback: expected rollover returns are infinite even if the rollover period is arbitrarily short. As a consequence such models cannot price one of the most widely used hedging instrument on the Euromoney market, namely the Eurofuture contract. The purpose of this paper is to show that the problem with lognormal models result from modelling the wrong rate, namely the continuously compounded rate. If instead one models the effective annual rate the problem disappears, i.e. the expected rollover returns are finite. The paper studies the resulting dynamics of the continuously compounded rate which is neither normal nor lognormal. 1. Introduction Most models of the term structure of interest rate which start with modelling the short rate r(t) are of the for...
Timedependent diffusion models for term structure dynamics
 STATISTICA NEERLANDICA
, 2003
"... In an effort to capture the time variation on the instantaneous return and volatility functions, a family of timedependent diffusion processes is introduced to model the term structure dynamics. This allows one to examine how the instantaneous return and price volatility change over time and price ..."
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Cited by 19 (8 self)
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In an effort to capture the time variation on the instantaneous return and volatility functions, a family of timedependent diffusion processes is introduced to model the term structure dynamics. This allows one to examine how the instantaneous return and price volatility change over time and price level. Nonparametric techniques, based on kernel regression, are used to estimate the timevarying coefficient functions in the drift and diffusion. The newly proposed semiparametric model includes most of the wellknown shortterm interest rate models, such as those proposed by Cox, Ingersoll and Ross (1985) and Chan, Karolyi, Longstaff and Sanders (1992). It can be used to test the goodnessoffit of these famous timehomogeneous short rate models. The newly proposed method complements the timehomogeneous nonparametric estimation techniques of Stanton (1997) and Fan and Yao (1998), and is shown through simulations to truly capture the heteroscedasticity and timeinhomogeneous structure in volatility. A family of new statistics is introduced to test whether the timehomogeneous models adequately fit interest rates for certain periods of the economy. We illustrate the new methods by using weekly threemonth treasury bill data.
Arbitrage Opportunities in ArbitrageFree Models of Bond Pricing
, 1996
"... Mathematical models of bond pricing are used by both academics and Wall Street practitioners, with practitioners introducing timedependent parameters to fit "arbitragefree" models to selected asset prices. We show, in a simple onefactor setting, that the ability of such models to reproduce a subs ..."
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Cited by 14 (1 self)
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Mathematical models of bond pricing are used by both academics and Wall Street practitioners, with practitioners introducing timedependent parameters to fit "arbitragefree" models to selected asset prices. We show, in a simple onefactor setting, that the ability of such models to reproduce a subset of security prices need not extend to statecontingent claims more generally. The popular BlackDermanToy model, for example, overprices call options on long bonds relative to those on short bonds when interest rates exhibit mean reversion. We argue, more generally, that the additional parameters of arbitragefree models should be complemented by close attention to fundamentals, which might include mean reversion, multiple factors, stochastic volatility, and/or nonnormal interest rate distributions. JEL Classification Codes: E43, G12, G13. Keywords: bond yields, options, fixed income derivatives, pricing kernel, statecontingent claims, timedependent drift and volatility. We thank Fi...