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Charles A. Dice Center for Research in Financial Economics
Indirect Robust Estimation of the Short-term Interest Rate Process
Veronika Czellar, G. Andrew Karolyi, and Elvezio Ronchetti
ABSTRACT
We introduce Indirect Robust Generalized Method of Moments (IRGMM), a new simulation-based estimation methodology, to model short-term interest rate processes. The primary advantage of IRGMM relative to classical estimators of the continuous-time short-rate diffusion processes is that it corrects both the errors due to discretization and the errors due to model misspecification. We apply this new approach to various monthly and weekly Eurocurrency interest rate series.
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