Chapter

A Multifactor, Nonlinear, Continuous‐Time Model of Interest Rate Volatility*

Jacob Boudoukh, Christopher Downing, Matthew Richardson, Richard Stanton and Robert F. Whitelaw

in Volatility and Time Series Econometrics

Published in print March 2010 | ISBN: 9780199549498
Published online May 2010 | e-ISBN: 9780191720567 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199549498.003.0014

Series: Advanced Texts in Econometrics

 A Multifactor, Nonlinear, Continuous‐Time Model of Interest Rate Volatility*

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This chapter provides a method for estimating multifactor continuous-time Markov processes. Using Milshtein's (1978) approximation schemes for writing expectations of functions of the sample path of stochastic differential equations in terms of the drift, volatility, and correlation coefficients, it provides nonparametric estimation of the drift and diffusion functions of multivariate stochastic differential equations. This technique is applied to the short- and long-end of the term structure for a general two-factor, continuous-time diffusion process for interest rates.

Keywords: continuous-time Markov processes; Milshtein; approximation; volatility; interest rates

Chapter.  11671 words.  Illustrated.

Subjects: Econometrics and Mathematical Economics

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