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Likelihood-based estimation of a semiparametric time-dependent jump diffusion model of the short-term interest rate. (English) Zbl 1511.91158

Summary: This paper proposes a semiparametric time-dependent jump diffusion model in an effort to capture the dynamic behavior of short-term interest rates. The newly proposed model includes a wide variety of well-known interest rate models, incorporating the time-varying instantaneous return, volatility as well as jump component. The local likelihood density estimation technique together with pseudo likelihood estimation method is employed to estimate the parameters of the model. Some simulations are conducted to examine the statistical performance of our estimators. The proposed procedure is then applied to analyze daily federal funds rate.

MSC:

91G30 Interest rates, asset pricing, etc. (stochastic models)
62P05 Applications of statistics to actuarial sciences and financial mathematics
60J74 Jump processes on discrete state spaces
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