Nonparametric density estimation and tests of continuous time interest rate models

I study the finite sample distribution of one of Ait-Sahalia's(1996c) nonparametric tests of continuous-time models of theshort-term riskless rate. The test rejects true models too oftenbecause interest rate data are highly persistent but the asymptoticdistribution of the test (and of the kernel density estimatoron which the test is based) treats the data as if it were independentlyand identically distributed. To attain the accuracy of the kerneldensity estimator implied by its asymptotic distribution with22 years of data generated from the Vasicek model in fact requires2755 years of data.