Which Model for the Italian Interest Rates?

Monica Gentile and Roberto Renò
Authors registered in the RePEc Author Service: Roberto Renò

LEM Papers Series from Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy

Abstract: In the recent years, di usion models for interest rates became very pop- ular. In this paper, we try to do a selection of a suitable di usion model for the Italian interest rates. Our data set is given by the yields on three-month BOT, from 1981 to 2001, for a total of 470 observations. We investigate among stochastic volatility models, paying more attention to a ne models. Estimating di usion models via maximum likelihood,which would lead to e ciency, is usually unfeasible since the transition density is not available. Recently it has been proposed a method of mo- ments which gains full e ciency, hence its name of E cient Method of Moments (EMM); it selects the moments as the scores of an auxiliary model, to be computed via simulation,thus EMM is suitable to di usions whose transition density is un- known, but which are convenient to simulate. The auxiliary model is selected among a family of densities which spans the density space. As a by-product, EMM provides diagnostics which are easy to compute and to interpret. We nd evidence that one- factor models are rejected, while a logarithmic speci cation of the volatility provides the best t to the data, in agreement with the ndings on U.S. data. Moreover, we provide evidence that this model allows a more exible representation of the yield curve.

Keywords: Estimation by simulation; method of moments; stochastic differential equations; diffusions; interest rate term structure; yield curve. (search for similar items in EconPapers)
Date: 2002-12-06
New Economics Papers: this item is included in nep-cba and nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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