On the Nonlinear Specifications of Short-Term Interest Rate Behavior: Evidence from Euro-Currency Markets

On the Nonlinear Specifications of Short-Term Interest Rate Behavior: Evidence from Euro-Currency... This paper presents a coherent nonlinear interest rate model that incorporates the dynamics of the error correction specification into the traditional term structure model. The joint tests based on six Euro-Currency rates indicate that the linear specification should be rejected. The estimated equation suggests that the linear components—the change of the long-term interest rate and the error correcting term are highly significant. The nonlinear components involving the higher order of the independent variables, the cross products, the lagged error squares, and/or the ARCH effect also present significant explanatory power for predicting short-term Euro-Currency rate changes, confirming the non-linear specifications. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

On the Nonlinear Specifications of Short-Term Interest Rate Behavior: Evidence from Euro-Currency Markets

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Publisher
Springer Journals
Copyright
Copyright © 1999 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1008302525246
Publisher site
See Article on Publisher Site

Abstract

This paper presents a coherent nonlinear interest rate model that incorporates the dynamics of the error correction specification into the traditional term structure model. The joint tests based on six Euro-Currency rates indicate that the linear specification should be rejected. The estimated equation suggests that the linear components—the change of the long-term interest rate and the error correcting term are highly significant. The nonlinear components involving the higher order of the independent variables, the cross products, the lagged error squares, and/or the ARCH effect also present significant explanatory power for predicting short-term Euro-Currency rate changes, confirming the non-linear specifications.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 21, 2004

References

  • New Evidence Concerning the Expectations Theory for the Short End of the Maturity Spectrum
    Choi, S.; Wohar, M.E.

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