Estimating the dynamics of interest rates in the Japanese economy

Abstract

The determination of the dynamics of the short-term interest rate is of importance for the pricing of bonds in the Japanese financial markets. This paper analyses the performance of the Yu and Phillips estimation method on Japanese interest rates based on an exact Gaussian discrete model of a continuous time model for the interest rate. This approach is used together with Nowman’s discrete time model to estimate different specifications of the interest rate, using interbank rates with different maturities. The study finds that the CIR model provides a good description of the interest rate and should be used in the pricing of bonds in the Japanese markets.