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Journal Article

An Empirical Comparison of Alternative Models of the Short-Term Interest Rate

K. C. Chan, G. Andrew Karolyi, Francis A. Longstaff and Anthony B. Sanders
The Journal of Finance
Vol. 47, No. 3, Papers and Proceedings of the Fifty-Second Annual Meeting of the American Finance Association, New Orleans, Louisiana January 3-5, 1992 (Jul., 1992), pp. 1209-1227
Published by: Wiley for the American Finance Association
DOI: 10.2307/2328983
Stable URL: http://www.jstor.org/stable/2328983
Page Count: 19
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
An Empirical Comparison of Alternative Models of the Short-Term Interest Rate
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Abstract

We estimate and compare a variety of continuous-time models of the short-term riskless rate using the Generalized Method of Moments. We find that the most successful models in capturing the dynamics of the short-term interest rate are those that allow the volatility of interest rate changes to be highly sensitive to the level of the riskless rate. A number of well-known models perform poorly in the comparisons because of their implicit restrictions on term structure volatility. We show that these results have important implications for the use of different term structure models in valuing interest rate contingent claims and in hedging interest rate risk.

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