Are there non-linearities in short-term interest rates?

The present paper investigates the characteristics of short-term interest rates in several countries. We examine the importance of nonlinearities in the mean reversion and volatility of short-term interest rates. We examine various models that allow the conditional mean (drift) and conditional variance (diffusion) to be functions of the current short rate.We find that different markets require different models. In particular, we find evidence of nonlinear mean reversion in some of the countries that we examine, linear mean reversion in others and no mean reversion in some countries. For all countries we examine, there is strong evidence of the need for the volatility of interest rate changes to be highly sensitive to the level of the short-term interest rate. Out-of-sample forecasting performance of one-factor short rate models is poor, stemming from the inability of the models to accommodate jumps and discontinuities in the time series data.

On the estimation and comparison of short-rate models using the generalised method of moments

Subsequent to the influential paper of [Chan, K.C., Karolyi, G.A., Longstaff, F.A., Sanders, A.B., 1992. An empirical comparison of alternative models of the short-term interest rate. Journal of Finance 47, 1209-1227], the generalised method of moments (GMM) has been a popular technique for estimation and inference relating to continuous-time models of the short-term interest rate. GMM has been widely employed to estimate model parameters and to assess the goodness-of-fit of competing short-rate specifications. The current paper conducts a series of simulation experiments to document the bias and precision of GMM estimates of short-rate parameters, as well as the size and power of [Hansen, L.P., 1982. Large sample properties of generalised method of moments estimators. Econometrica 50, 1029-1054], J-test of over-identifying restrictions. While the J-test appears to have appropriate size and good power in sample sizes commonly encountered in the short-rate literature, GMM estimates of the speed of mean reversion are shown to be severely biased. Consequently, it is dangerous to draw strong conclusions about the strength of mean reversion using GMM. In contrast, the parameter capturing the levels effect, which is important in differentiating between competing short-rate specifications, is estimated with little bias. (c) 2006 Elsevier B.V. All rights reserved.

Prediction of steady-state flux through variably saturated zones within a septic absorption trench

This paper describes effluent flow dynamics within a septic absorption system and the prediction of flow through the biomat and sub-biomat zone. Using soil hydraulic properties in a one dimensional model we demonstrate how soil hydraulic properties interact with biomat resistances to determine long-term acceptance rate (LTAR). The LTAR is a key parameter used in the Australian and New Zealand Standard AS1547:2000 to calculate the area of trench required to ensure trenches are not overloaded. Results show that several orders of magnitude variation in saturated hydraulic conductivity (Ks) collapse to a one order of magnitude variation in LTAR. These results are calculated from a model using basic flow theory, allowing LTAR to be estimated for any combination of biomat resistance and soil hydraulic properties. To increase the reliability of prediction of septic trench hydrology, HYDRUS 2D was used to model two dimensional flow. For more permeable soils, the exfiltration zone above sidewall biomat growth is shown to be a key pathway for excess effluent flow.