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Bayesian testing for short term interest rate models
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DOI：10.1016/j.frl.2016.09.020.png)
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Abstract
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In empirical finance, interest rate models have been widely used for modeling short-term interest rate. Under the framework of the hypothesis testing, this paper provides a Bayesian approach for comparing a range of alternative models. These compared models are nested in a general single-factor diffusion process for the short-term interest rate, with each alternative model indexed by the level effect parameter for the volatility. The performance of the developed procedure is illustrated by an empirical example of Eurodollar deposit rates. (C) 2016 Elsevier Inc. All rights reserved.
Keywords:
Bayes factor
chi(2) test
Markov Chain Monte Carlo (MCMC)
Short-term interest rate models
Hypothesis testing
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