Drift and Diffusion Function Specification for Short-Term Interest Rates

• Main Authors: LEE, Myoung-jae, LI, Wen Juan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2005
• Subjects: Short rate; Diffusion; Spatial correlation; Econometrics
• Online Access: https://ink.library.smu.edu.sg/soe_research/177; https://ink.library.smu.edu.sg/context/soe_research/article/1176/viewcontent/DriftDiffusionFunction_Specification_2005.pdf
• Institution: Singapore Management University

Various stochastic differential equation models for short rates (rt) have been proposed, where the change (Δrt = rt−rt−1) is modeled as a sum of drift and diffusion terms depending on rt−1. These models, however, have some shortcomings. First, the same model may not apply to all countries. Second, t...