Indirect Robust Estimation of the Short-term Interest Rate Process

Abstract

We propose Indirect Robust Generalized Method of Moments (IRGMM), a simulationbased estimation methodology, to model short-term interest rate processes. The primary advantage of IRGMM relative to classical estimators of the continuous-time short-rate diffusion processes is that it corrects both the errors due to discretization and the errors due to model misspecification. We apply this approach to monthly US risk free rates and to various monthly Eurocurrency rates and provide extensive evidence of its predictive performances in a variety of settings.

Optimal risk transfer under quantile-based risk measurers

“…Welsch and Zhou, 2007), interest-rate models (e.g. Czellar et al, 2007), ruin probabilities (e.g. Loisel et al, 2008), time series modelling (e.g.…”

Accurate and robust tests for indirect inference

“…In more complex models, such simple robust indirect inference estimators may not be available. Instead, indirect robust generalized method of moments estimators can be used, as developed in Czellar et al (2007). As an illustration, we choose parameter values β = −0·05 and σ = 0·2, we consider three hypotheses for the parameters: H 0 : (β, σ ) T = (−0·05, 0·2) T , H 0 : β = −0·05 and H 0 : σ = 0·2, and we study the accuracy ofŜ and robustŜ tests at the model and in the presence of contamination.…”

“…In the frequentist framework, indirect inference is a broad class of estimators that includes the method of moments and the generalized method of moments estimators (Hansen, 1982) with additively separable orthogonality functions, and simulated method of moments estimators (Lee & Ingram, 1991;Duffie & Singleton, 1993). Indirect inference estimators were introduced by Smith (1993) and Gouriéroux et al (1993), and have now been applied in a variety of fields, including financial models (Gouriéroux & Monfort, 1996;Billio & Monfort, 2003;Czellar et al, 2007;Calzolari et al, 2008) and in regression models with measurement error (Kuk, 1995;Turnbull et al, 1997;Jiang et al, 1999). Good surveys on indirect inference are provided by Heggland & Frigessi (2004) and Jiang & Turnbull (2004).…”

Through the looking glass: Indirect inference via simple equilibria

“…Our first application is the long-run risk (LRR) model of Bansal and Yaron (2004), which has received considerable attention in fi-3 Further advances in indirect inference include Calzolari et al (2004), Czellar et al (2007, Czellar and Ronchetti (2010), Genton and Ronchetti (2003), Gouriéroux et al (2010), Heggland and Frigessi (2004), and Sentana et al (2008).…”