On the Nonlinear Specifications of Short-Term Interest Rate Behavior: Evidence from Euro-Currency Markets |
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Authors: | Chiang Thomas C Chiang Jeanette Jin |
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Institution: | (1) Marshall M. Austin, Drexel University, USA;(2) PV International, USA |
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Abstract: | 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. |
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Keywords: | Euro currency nonlinear models error correction model term structure of interest rates |
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