Is Nonlinear Drift Implied by the Short End of the Term Structure?

Nonlinear drift models of the short rate are estimated usingdata on the short end of the term structure, where the cross-sectionalrelation is obtained by an analytical approximation. The findingsreveal that (i) nonlinear physical drift is not implied unlessit is strongly affected by cross-sectional dimensions of thedata; (ii) nonlinear risk-neutral drift that allows for fastmean reversion for high rates is desirable to explain and predictobserved patterns of yield spreads; and (iii) for higher frequencydata from which transitory shocks are removed, (ii) still remainsvalid although the nonlinearity is somewhat reduced.