Indirect robust estimation of the short-term interest rate process

V. CZELLAR, G. Andrew Karolyi, E. Ronchetti

Journal of Empirical Finance

septembre 2007, vol. 14, n°4, pp.546-563

Départements : Economie et Sciences de la décision

We propose Indirect Robust Generalized Method of Moments (IRGMM), a simulation-based estimationmethodology, to model short-term interest rate processes. The primary advantage of IRGMM relative toclassical estimators of the continuous-time short-rate diffusion processes is that it corrects both the errorsdue to discretization and the errors due to model misspecification. We apply this approach to monthly USrisk free rates and to various monthly Eurocurrency rates and provide extensive evidence of its predictiveperformances in a variety of settings.