An Empirical Study Of Short Term Interest Rate Dynamic Process Under The General Equilibrium Framework

Before the work of Lioui and Poncet(2003),general equilibrium models derived the real interest rate stochastic dynamic processes,but because there is no such real interest rate data in the world,most scholars used the nominal interest rate data to replace the real interest rate.By introducing the uncertainty of inflation to the framework of general equilibrium model,Lioui and Poncet(2003) derived the stochastic dynamic process of nominal interest rate.This paper used the data of US T-bills return with one month maturity from June 14^th 1961 to February 20^th 2009 to do empirical research on nominal interest rate stochastic process of Lioui and Poncet(2003).We discussed the mechanism of the model,by using the mathematic tools such as stochastic calculus,the moment generating function of the model is derived and then we chose the first four moments to estimate the parameters.We found that the estimated drift parameters were insignificant in the both models,indicating the nominal interest rate was not predictable by using these two models.However,when we looked in to another dataset with downward trend property,the estimation of all the three parameter of the square root volatility process were significant,this implies that the model captures the evolution of the nominal interest rate well from September 4^th,1981 to December 12^th, 1986.