A Further Look at Short –Term Interest Rate Dynamics

Abstract

Short-term interest rate analysis is one of the most important topics in finance and economics. This paper looks at short-term interest rate dynamics using three different interest rate proxies with different maturities, one-month Eurodollar deposit rate, overnight Federal Funds rate, and Three-month Treasury bill yield under one flexible parametric specifications. This flexible parametric specification is one-factor diffusion model with several nested cases. The analyzed data series and used flexible parametric specification encompasses enormous literature in the area, used in books and analyzed in articles. The result evaluates the nonlinear drift specification and linear drift specifications. The name of the paper is inspired by its guiding article by Turan G. Bali et al. (2006). Their theoretical framework is base of this paper.