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On the specification of the drift and diffusion functions for continuous-time models of the spot interest rate

Hurn, Stanley & Lindsay, Kenneth A. (2002) On the specification of the drift and diffusion functions for continuous-time models of the spot interest rate. Oxford Bulletin of Economics and Statistics, 64(5), pp. 547-564.

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Abstract

his paper explores the specification of drift and diffusion functions for continuous-time short-term interest rate models. Various forms for the drift and diffusion of 7-day Eurodollar rates are proposed and then estimated by discrete maximum-likelihood. The results suggest that a nonparametric specification of drift and volatility in terms of orthogonal polynomial expansions is effective in eliminating problems of parameter identification encountered previously. Some evidence is found to support the claim that the drift of the short term interest rate is nonlinear.

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ID Code: 8373
Item Type: Journal Article
Additional Information: For more information, please refer to the journal’s website (see hypertext link) or contact the author. Author contact details: s.hurn@qut.edu.au
Keywords: Drift and Diffusion Functions, Continuous, time Models, Spot Interest Rate
DOI: 10.1111/1468-0084.00277
ISSN: 0305-9049
Subjects: Australian and New Zealand Standard Research Classification > ECONOMICS (140000)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Copyright Owner: Copyright 2002 Blackwell Publishing
Copyright Statement: The definitive version is available at www.blackwell-synergy.com
Deposited On: 02 Jul 2007
Last Modified: 23 Sep 2013 16:36

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