Abstract
A simulated maximum likelihood (SML) estimator is derived in order to estimate a jump-diffusion model of interest rates, which takes explicitly into account the monetary system by forcing a corridor on the short term interest rates. In order to obtain the SML estimator, we develop a method to simulate a diffusion process through certain values at future time points. The method is based on Monte Carlo simulations where we make use of a discretization scheme for the dynamics. A finite difference approach is used to obtain the entire term structure of interest rates. The method is applied on interest rate data from the German money market, and the results show that the authorities only have direct impact on the short end of the term structure, given that they try to change the level of the corridor.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
