Facoltà di scienze economiche

Indirect robust estimation of the short-term interest rate process

Czellara, Veronika ; Karolyib, G. Andrew ; Ronchetti, Elvezio

In: Journal of Empirical Finance, 2007, vol. 14, no. 4, p. 546-563

We propose Indirect Robust Generalized Method of Moments (IRGMM), a simulationbased estimation methodology, to model short-term interest rate processes. The primary advantage of IRGMM relative to classical estimators of the continuous-time short-rate diffusion processes is that it corrects both the errors due to discretization and the errors due to model misspecification. We apply this approach... Plus

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    Summary
    We propose Indirect Robust Generalized Method of Moments (IRGMM), a simulationbased estimation methodology, to model short-term interest rate processes. The primary advantage of IRGMM relative to classical estimators of the continuous-time short-rate diffusion processes is that it corrects both the errors due to discretization and the errors due to model misspecification. We apply this approach to monthly US risk free rates and to various monthly Eurocurrency rates and provide extensive evidence of its predictive performances in a variety of settings.