Please use this identifier to cite or link to this item: https://doi.org/10.1016/j.jempfin.2007.06.003
Title: Is long memory necessary? An empirical investigation of nonnegative interest rate processes
Authors: Duan, J.-C. 
Jacobs, K.
Keywords: GARCH
Heteroskedasticity
Interest rate
Long memory
Nonnegativity
Term structure
Issue Date: 2008
Source: Duan, J.-C., Jacobs, K. (2008). Is long memory necessary? An empirical investigation of nonnegative interest rate processes. Journal of Empirical Finance 15 (3) : 567-581. ScholarBank@NUS Repository. https://doi.org/10.1016/j.jempfin.2007.06.003
Abstract: This paper analyzes a class of nonnegative processes for the short-term interest rate. The dynamics of interest rates and yields are driven by the dynamics of the conditional volatility of the pricing kernel. We study Markovian interest rate processes as well as more general non-Markovian processes that display "short" and "long" memory. These processes also display heteroskedasticity patterns that are more general than those of existing models. We find that deviations from the Markovian structure significantly improve the empirical performance of the model. Certain aspects of the long memory effect can be captured with a (less parsimonious) short memory parameterization, but a simulation experiment suggests that the implied term structures corresponding to the estimated long- and short-memory specifications are very different. We also find that the choice of proxy for the short rate affects the estimates of heteroskedasticity patterns. © 2007 Elsevier B.V. All rights reserved.
Source Title: Journal of Empirical Finance
URI: http://scholarbank.nus.edu.sg/handle/10635/44424
ISSN: 09275398
DOI: 10.1016/j.jempfin.2007.06.003
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