TITLE:
Testing Continuous-Time Interest Rate Model for Chinese Repo Market
AUTHORS:
Huimin Zhao, Fangping Peng
KEYWORDS:
Chinese Repo Market, Interest Rate, Nonparametric Estimation
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.5 No.1,
January
29,
2015
ABSTRACT: This paper tests the popular continuous-time interest rate models for Chinese repo market to address what and how the interest rates change with the marketlization in China. Using Bandi [1]’s method, we get the functional nonparametric estimation of drift and diffusion terms and the local time of the process. We find that the interest rates of China during the period from 1993 to 2003 are bimodal distributed and propose a two-regime model which can fit the data better. We also study the probabilities that the process will stay the two regimes respectively and its transition probability that the process transfers from one regime to another regime.