02147cas a2200241 a 4500 AALejournalIMF013939 230101c9999 xx r poo 0 0eng d 5.00 USD 9781475594645 1018-5941 BD-DhAAL BD-DhAAL Khramov, Vadim. Estimating Parameters of Short-Term Real Interest Rate Models / Vadim Khramov. Washington, D.C. : International Monetary Fund, 2013. 1 online resource (27 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students This paper sheds light on a narrow but crucial question in finance: What should be the parameters of a model of the short-term real interest rate? Although models for the nominal interest rate are well studied and estimated, dynamics of the real interest rate are rarely explored. Simple ad hoc processes for the short-term real interest rate are usually assumed as building blocks for more sophisticated models. In this paper, parameters of the real interest rate model are estimated in the broad class of single-factor interest rate diffusion processes on U.S. monthly data. It is shown that the elasticity of interest rate volatility-the relationship between the volatility of changes in the interest rate and its level-plays a crucial role in explaining real interest rate dynamics. The empirical estimates of the elasticity of the real interest rate volatility are found to be about 0.5, much lower than that of the nominal interest rate. These estimates show that the square root process, as in the Cox-Ingersoll-Ross model, provides a good characterization of the short-term real interest rate process. Mode of access: Internet IMF Working Papers; Working Paper ; No. 2013/212 Full text available on IMF http://elibrary.imf.org/view/journals/001/2013/212/001.2013.issue-212-en.xml IMF e-Library