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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Kluwer Academic Publishers
Copyright © 1999 by Kluwer Academic Publishers
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
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