2 edition of **Estimating one-factor models of short-term interest rates** found in the catalog.

Estimating one-factor models of short-term interest rates

Desmond John Mc Manus

- 265 Want to read
- 25 Currently reading

Published
**1999**
by Bank of Canada in [Ottawa]
.

Written in English

- Interest rates -- Mathematical models.

**Edition Notes**

Statement | by Des Mc Manus and David Watt. |

Series | Bank of Canada working paper -- 99-18, Working paper (Bank of Canada) -- 99-18. |

Contributions | Watt, David G., Bank of Canada. |

The Physical Object | |
---|---|

Pagination | v, 36 p. : |

Number of Pages | 36 |

ID Numbers | |

Open Library | OL18922901M |

ISBN 10 | 0662283082 |

John Hull and Alan White, "One factor interest rate models and the valuation of interest rate derivative securities," Journal of Financial and Quantitative Analysis, No 2, (June ) pp. – John Hull and Alan White, "Pricing interest-rate derivative securities", The Review of Financial Studies, Vol 3, No. 4 () pp. – deficit reduction and recent declines in long-term interest rates. 1. Theory: RE models of the term structure The theoretical basis of our bond rate model is the standard Expectations Hypothesis: The yield to maturity on a bond is equal to a weighted average value of the short-term rate (rationally).

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. Although models for the nominal interest rate are well studied and estimated, dynamics of the real interest rate are rarely explored. Simple ad hoc processes for the short-term real interest rate are usually assumed as building blocks for more sophisticated models. In this paper, parameters of the real interest rate model are estimated in the Cited by: 1.

HJM (Heath-Jarrow-Morton) model is a very general framework used for pricing interest rates and credit derivatives. Big banks trade hundreds, sometimes even thousands, of different types of derivatives and need to have a modeling/technological framework which can quickly accommodate new payoffs. Compare this problem to that in physics. has focused on building and estimating dynamic models of the term structure. By specifying particular functional forms for both the risk-neutral dynamics of short-term interest rates and the compensation investors require to bear interest rate risk, these models describe the evolution of yields at all maturities.

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Estimating One-Factor Models of Short-Term Interest Rates There currently exists in the literature several continuous-time one-factor models for short-term interest rates. This paper considers a wide range of these models that are nested into one general model.

Considers a wide range of several continuous-time one-factor models for short-term interest rates that are nested into one general model. BibTeX @MISC{Manus99estimatingone-factor, author = {Des Mc Manus and David Watt and Des Mc Manus and David Watt}, title = {Estimating One-Factor Models of Short-Term Interest Rates,” Bank of Canada Working Paper No}, year = {}}.

There currently exists in the literature several continuous-time one-factor models for short-term interest rates.

This paper considers a wide range of these models that are nested into one general by: 5. By estimating single-factor models for the short-term real interest rate, it is shown that the relationship between the volatility of changes in the interest rate and its level–called the elasticity of interest rate volatility–plays a crucial role in explaining real interest rate Size: KB.

Estimating One-Factor Models of Short-Term Interest Rates. By Des Mc Manus and David Watt. Abstract. There currently exists in the literature several continuous-time one-factor models for short-term interest rates. This paper considers a wide range of these models that are nested into one general model.

These models are approximated using both Author: Des Mc Manus and David Watt. In this paper, parameters of the real interest rate model are estimated in the broad class of single-factor interest rate diffusion processes on U.S.

monthly data. It is shown that the elasticity of interest rate volatility—the relationship between the volatility of changes in the interest rate and its level—plays a crucial role in explaining real interest rate dynamics.

In short rate models, bond prices and term structures of interest rates are determined by the parameters of the model and the current level of the instantaneous interest rate (so called short rate).

model with a one-factor model. There are essentially two factors which are assumed to a⁄ect changes in the short-term interest rate: the level of the interest rate and the instantaneous variance of interest rate changes, that is, the ,the properties of the conditionalmean of.

For the Vasicek models, Table 4 shows the results of parameters estimated for the one-factor Vasicek model. All parameters in the model but one, are statistically significant. The parameter α is estimated as 4, which is significant, implying that α mean reversion is found in the interest rate dynamics.

The estimate of for α implies a mean half life of years 5 in the Cited by: 3. One-Factor Interest-Rate Models and the Valuation of Interest-Rate Derivative Securities Article (PDF Available) in Journal of Financial and Quantitative Analysis 28(02) June with.

Summary. This paper considers the estimation in models of the instantaneous short interest rate from a new perspective. Rather than using discretely compounded market rates as a proxy for the instantaneous short rate of interest, we set up the stochastic dynamics for the discretely compounded market observed rates and propose a dynamic Bayesian estimation algorithm (i.e.

a filtering Cited by: 5. Short rate models define a process followed by the short rate, in order to model changes in the term structure of interest rates (i.e., the yield curve).This short rate, is the instantaneous rate (continuously compounded) at time To understand the short rate, the closest market rate would be an overnight rate and would be something akin to the forward overnight rate at time.

Estimating One-Factor Models of Short-Term Interest Rates. Staff Working Paper Des Mc Manus, David Watt. There currently exists in the literature several continuous-time one-factor models for short-term interest rates.

This paper considers a wide range of these models that are nested into one general model. One-Factor Interest-Rate Models and the Valuation of Interest-Rate Derivative Securities John Hull and Alan White* Abstract This paper compares different approaches to developing arbitrage-free models of the term structure.

It presents a numerical procedure that can be used to construct a wide range of one-factor models of the short rate that. We obtain consistent parameter estimates of continuous-time stochastic volatility diffusions for the U.S.

risk-free short-term interest rate, sampled weekly over –, using the Efficient Method of Moments procedure of Gallant and by: Short-term interest rate models Since we only focus on the Vasicek model and the CIR model, related papers are reviewed at first.

The original author, Vasicek (), derived the general form of the term structure of interest rates. He first proposed a general form of the interest rate term structure with three : Yajie Zhao, Boru Wang. Photo by M. on Unsplash 3 Short Term rate Models. Model 1 — without drift; 2.

Model 2 — constant drift. Ho-Lee — Time deterministic drift. For each of the models, we will explain Author: Farhad Malik. Vasicek Interest Rate Model: A method of modeling interest rate movement that describes the movement of an interest rate as a factor of market risk, time and equilibrium value that the rate.

A Methodology to Estimate the Interest Rate Yield Curve ournal o Emerging Market Finance, Vasicek () is one of the first term structure models, which was used extensively in valuing bond options, futures and other fixed income derivatives. It remains the benchmark core model for its simplicity in.

Statistical Factor Models: Principal Factor Method. Estimation of Multifactor Model. Multifactor model satis es the Generalized Gauss-Markov assumptions so the least-squares estimates ^ i. and ^ (K 1) from the time-series regression for each asset i are best linear unbiased estimates (BLUE) and the MLEs under Gaussian assumptions.

x ^ i = 1. T. This article aims to introduce a number of mean-reverting short term interest rate models which can forecast and evolve interest rates. These models are known as term structure : Farhad Malik. Hull–White Model: A single-factor interest model used to price derivatives.

The Hull-White model assumes that short rates have a normal distribution, and that the short rates Author: Will Kenton.