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Are Levels Effects Important In Out-Of-Sample Performance Of Short Rate Models?, Sandy Suardi
Are Levels Effects Important In Out-Of-Sample Performance Of Short Rate Models?, Sandy Suardi
Sandy Suardi
This paper derives short-term interest rate volatility forecasts from various interest rate models. While models that specify both GARCH and levels effects are superior in their forecasts accuracy, they systematically under predict interest rate volatility more frequently than simple short rate models.
Modelling And Forecasting Short-Term Interest Rate Volatility: A Semiparametric Approach, Aijun Hou, Sandy Suardi
Modelling And Forecasting Short-Term Interest Rate Volatility: A Semiparametric Approach, Aijun Hou, Sandy Suardi
Sandy Suardi
This paper employs a semiparametric procedure to estimate the diffusion process of short-term interest rates. The Monte Carlo study shows that the semiparametric approach produces more accurate volatility estimates than models that accommodate asymmetry, level effect and serial dependence in the conditional variance. Moreover, the semiparametric approach yields robust volatility estimates even if the short rate drift function and the underlying innovation distribution are misspecified. Empirical investigation with the U.S. three-month Treasury bill rates suggests that the semiparametric procedure produces superior in-sample and out-of-sample forecast of short rate changes volatility compared with the widely used single-factor diffusion models. This forecast …