The Dynamics of Short-term Interest rates: an econometric analysis

Prakash G Apte

Document Type

Article

Publication Title

Indian Economic Review

Abstract

Single factor models of term structure have been extensively employed for valuation of interest rate contingent claims. There are a large number of short rate models some of which are special cases of others. In this paper we have estimated five different models of the dynamics of the short rate using alternative data sets on MIBOR and T-bill yields. We use two of the estimated models to construct zero coupon yield curves for a particular day and compare it with the yield curve extracted from bond price data using a curve fitting procedure. We also compare option prices implied by the two models. We find that the term structures implied by the estimated models differ significantly from the yield curve estimated by curve fitting procedures. Also, the two models yield significantly different values for a particular option on a zero coupon bond.

Publication Date

1-4-2001

Publisher

Springer

Volume

Vol.36

Issue

Iss.2

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