Chapman, D.A. and Pearson, N.D. (2000). Is the short rate drift actually nonlinear ? Journal of Finance, LV, 355-388.  Home/Search   Document Details and Download   Summary   Related Articles   Check

....studies also con rm our asymptotic results. This variance in ation problem arises not only from nonparametric tting, but also from parametric tting. Stanton s work postulates an interesting question of whether the short term rate drift is nonlinear. Based on empirical simulation studies, Chapman and Pearson (2000) suggested that the nonlinearity might be spurious, due to boundary e ect of kernel estimators. This prompts us to use the local linear t based on the rst order approximation, proposed by Fan and Yao (1998) to ameliorate the boundary e ect, and to construct formal tests of parametric nancial ....

....unknown conditional expectations which are estimated by the N W kernel estimator. Stanton s approach to estimating di usion function ( ignores the drift function ( This makes his method simple and attractive. Stanton s approach encounters both exogenous and endogenous problems. Recently, Chapman and Pearson (2000) studied the nite sample properties of Stanton s estimator based on the rstorder approximation. By applying this procedure to simulated sample paths of a square root di usion, they found that Stanton s estimator produces spurious nonlinearity when the true underlying 2 drift function is indeed ....

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Chapman, D.A., and Pearson, N.D. (2000), \Is the Short Rate Drift Actually Nonlinear ?" Journal of Finance, LV, 355-388.

....On the other hand, the regression residuals look quite like martingale sequences, supplying no incentive to pursue a more complex approach for estimation of the covariance matrix. 13 This is nice as it suggests that bandwidth problems due to persistency of state variables (see Prisker (1998) and Chapman and Pearson (1999)) may not be a serious issue to our approach. 9 changes in the bandwidth. Secondly, it looks like a free lunch that N has standard limiting distribution and the parametric convergence rate, no matter how many state variables we use. However, it should be noted that there is certain cost ....

Chapman, David A., and Neil D. Pearson, 1999, Is the short rate drift actually nonlinear, forthcoming in Journal of Finance.

....to stochastic volatility models, but none of these methods allow for measurement noise explicitly. This also holds for the nonparametric methods proposed by (At Sahalia, 1996a; At Sahalia, 1996b; Stanton, 1997; Jiang and Knight, 1997; Bak, 1998) and compared using Monte Carlo simulation by (Chapman and Pearson, 1998; Jiang and Knight, 1999) Pritsker (1998) analyzes the power of the tests proposed by (At Sahalia, 1996b) An overview of parameter estimation methods for discretely observed SDEs is given in (Nielsen, Madsen and Young, 1999) In Section 2 the modelling framework is put forth. The proposed PEFMs ....

Chapman, D. A. and Pearson, N. D. (1998), Is the short rate drift actually nonlinear?, Technical report, Finance Department, Graduate School of Business, The University of Texas at Austin.

....important for describing the term structure. The result supports the ndings of A t Sahalia (1996b) and Stanton (1997) who provide evidence that the drift of the short rate process is nonlinear. However, evidence of the nonlinearity of the drift of the short rate remains somewhat controversial; Chapman and Pearson (2000) provide evidence suggesting that this nonlinearity is not a robust stylized fact. Insofar as the non ane class of models nested in the QTSM framework implies a nonlinear drift for the short rate, the model is consistent with these ndings. Furthermore, the results suggest that it is probable that ....

Chapman, D., and N. Pearson, 2000, \Is the Short Rate Drift Actually Nonlinear?", Journal of Finance, 55, 355-388.

....more frequently on Wednesdays, probably on account of option expiry eects. Fifth, there is a growing literature on the non linearity of the drift in interest rates, which has cast doubts on the simple linear mean reverting form used in most diusion models (see Ait Sahalia [2] Chapman and Pearson [21], and Stanton [54] The addition of a jump 2 See Backus, Foresi and Wu [7] for an excellent exposition of why jumps may better explain the high degree of curvature in yield curves. 3 Coleman, Fisher and Ibbotson [23] nd that in the 1980s, the standard deviation of monthly changes in the short ....

....signicance of the jump process. An additional caveat is required here. Recent research has shown that nite sample estimators of these models often demonstrate non linearity even when the data has been generated from a model with linear drift. In particular, the papers by Chapman and Pearson [21] and Pritsker [51] demonstrate this quite conclusively. Hence, the nding of non linearity in these models even with jumps needs to be read with some caution. We plot in Figure 7 the graph of the drift term for the pure diusion model and the jumpdi usion model. The steeper (dashed) line shows the ....

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CHAPMAN, D.A., and N. D. PEARSON. \Is the Short Rate Drift Actually Nonlinear?" 1998, Mimeo, University of Texas, Austin and University of Illinois at Urbana-Champaign. 40 INTEREST RATE JUMP-DIFFUSIONS

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Chapman, D.A. and Pearson, N.D. (2000). Is the short rate drift actually nonlinear ? Journal of Finance, LV, 355-388.

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