Markov-Switching and Stochastic Volatility Diffusion Models of Short-Term Interest Rates ∗

@inproceedings{Smith2000MarkovSwitchingAS,
  title={Markov-Switching and Stochastic Volatility Diffusion Models of Short-Term Interest Rates ∗},
  author={Daniel R. Smith},
  year={2000}
}
This paper empirically compares the Markov-switching and stochastic volatility diffusion models of the short rate. The evidence supports the Markov-switching diffusion model. Estimates of the elasticity of volatility parameter for single regime models unanimously indicate an explosive volatility process, while the Markov-switching models estimates are reasonable. We find that either Markov-switching or stochastic volatility, but not both, are needed to adequately fit the data. A robust… CONTINUE READING
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