On the Nonlinear Specifications of Short-Term Interest Rate Behavior: Evidence from Euro-Currency Markets.
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. Copyright 1999 by Kluwer Academic Publishers
Year of publication: |
1999
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Authors: | Chiang, Thomas C ; Chiang, Jeanette Jin |
Published in: |
Review of Quantitative Finance and Accounting. - Springer. - Vol. 12.1999, 4, p. 351-70
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Publisher: |
Springer |
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