SHORT-TERM INTEREST-RATE MODELS AND GENERATION OF INTEREST-RATE SCENARIOS

This paper investigates the stochastic behaviour of the short-term int erest rates. The lognormal model, the stable Paretian model and the co ntinuous time mean reversion model are considered. The parameters of t he models are estimated using 17 years of weekly data. Our results sho w that the lognormal and the stable Paretian models are likely to give rise to unreasonably large interest rate values even for horizon of f ive years. In comparison, the mean reversion model appears to provide more realistic results than the other two models.