Elasticity of Variance and Jackknife Estimation of Short-Term Interest Rates

In this article, we illustrate that the estimation procedure applied in Chan et al. (1992) hereafter referred to as CKLS (1992) - for estimating short-term interest rate models suffers from significant estimation bias. We show by Monte Carlo simulations that the application of the jackknife estimation of Quenouille (1956) provides substantial bias reduction. We provide empirical distributions for parameter tests depending on the elasticity of conditional variance of changes in the short-term interest rate. Using daily, weekly and monthly observations of the three-month U.S. Treasury bill yield and the federal funds rate, we demonstrate that the estimation results can depend on both the sampling frequency and the proxy that is used for the short-term