Comparison of models of the short-term LIBOR rate
Vinoo Venkatesh · Summit (Simon Fraser University) · 2006
This paper replicates part of the study conducted by Chan et a1 (1992) wherein different diffusion models of the short-rate were compared as special cases of a more general unrestricted short-rate model.Using the Generalized Method of Moments, it was found that while the models which allowed for higher elasticity of variance were better able to forecast squared changes in interest rates.However, the most successful models in capturing the interest rate dynamics are not always the models which allow the conditional volatility of the interest rate changes to be highly sensitive to the level of the interest rate.