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Short Rate Models (short + rate_models)

Distribution by Scientific Domains

Business, Economics, Finance and Accounting	100%

Selected Abstracts

Forecasting and Finite Sample Performance of Short Rate Models: International Evidence,

INTERNATIONAL REVIEW OF FINANCE, Issue 3-4 2005
SIRIMON TREEPONGKARUNA
ABSTRACT This paper evaluates the forecasting and finite sample performance of short-term interest rate models in a number of countries. Specifically, we run a series of in-sample and out-of-sample tests for both the conditional mean and volatility of one-factor short rate models, and compare the results to the random walk model. Overall, we find that the out-of-sample forecasting performance of one-factor short rate models is poor, stemming from the inability of the models to accommodate jumps and discontinuities in the time series data. In addition, we perform a series of Monte Carlo analyses similar to Chapman and Pearson to document the finite sample performance of the short rate models when ,3 is not restricted to be equal to one. Our results indicate the potential dangers of over-parameterization and highlight the limitations of short-term interest rate models. [source]

On the Existence of Finite-Dimensional Realizations for Nonlinear Forward Rate Models

MATHEMATICAL FINANCE, Issue 2 2001
Tomas Björk
We consider interest rate models of the Heath,Jarrow,Morton type, where the forward rates are driven by a multidimensional Wiener process, and where the volatility is allowed to be an arbitrary smooth functional of the present forward rate curve. Using ideas from differential geometry as well as from systems and control theory, we investigate when the forward rate process can be realized by a finite-dimensional Markovian state space model, and we give general necessary and sufficient conditions, in terms of the volatility structure, for the existence of a finite-dimensional realization. A number of concrete applications are given, and all previously known realization results (as far as existence is concerned) for Wiener driven models are included and extended. As a special case we give a general and easily applicable necessary and sufficient condition for when the induced short rate is a Markov process. In particular we give a short proof of a result by Jeffrey showing that the only forward rate models with short rate dependent volatility structures which generically possess a short rate realization are the affine ones. These models are thus the only generic short rate models from a forward rate point of view. [source]