Gaussian estimation of continuous time models of the short term interest rate

• Main Authors: YU, Jun, PHILLIPS, Peter C. B.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2001
• Subjects: Gaussian Estimation; Nonlinear Diffusion; Normalizing Transformation; Econometrics; Finance
• Online Access: https://ink.library.smu.edu.sg/soe_research/2114; https://ink.library.smu.edu.sg/context/soe_research/article/3114/viewcontent/SSRN_id278539__1_.pdf
• Institution: Singapore Management University

This paper proposes a Gaussian estimator for nonlinear continuous time models of the short term interest rate. The approach is based on a stopping time argument that produces a normalizing transformation facilitating the use of a Gaussian likelihood. A Monte Carlo study shows that the finite sample performance of the proposed procedure offers an improvement over the discrete approximation method proposed by Nowman (1997). An empirical application to U.S. and British interest rates is given.