Modeling the Dynamics of Shanghai Interbank Offered Rate Based on Single-Factor Short Rate Processes

Abstract EN

Using the Shanghai Interbank Offered Rate data of overnight, 1 week, 2 week and 1 month, this paper provides a comparative analysis of some popular one-factor short rate models, including the Merton model, the geometric Brownian model, the Vasicek model, the Cox-Ingersoll-Ross model, and the mean-reversion jump-diffusion model.

The parameter estimation and the model selection of these single-factor short interest rate models are investigated.

We document that the most successful model in capturing the Shanghai Interbank Offered Rate is the mean-reversion jump-diffusion model.