Review of Financial Studies Vol. 21 No. 1 2008
Is Nonlinear Drift Implied by the Short End of the Term Structure?
Abstract
[Nonlinear drift models of the short rate are estimated using data on the short end of the term structure, where the cross-sectional relation is obtained by an analytical approximation. The findings reveal that (i) nonlinear physical drift is not implied unless it is strongly affected by cross-sectional dimensions of the data; (ii) nonlinear risk-neutral drift that allows for fast mean reversion for high rates is desirable to explain and predict observed patterns of yield spreads; and (iii) for higher frequency data from which transitory shocks are removed, (ii) still remains valid although the nonlinearity is somewhat reduced.]
- Volume
- 21
- Issue
- 1
- Pages
- 311-346
- Sources
- bibtex:phds-export.bib