The Volatility of Greek Interbank Rates: A Continuous Time Analysis

In this paper we investigate the relationship between the volatility of Greek interbank rates and the level of rates by estimating the important CKLS interest rate model using the estimation method of (Nowman, 1997). We also estimate the interest rate models of Merton, Vasicek, CIRSR, Dothan, GBM, Brennan and Schwartz, CIRVR and CEV models. We find the volatility of short-term rates is highly sensitive to the level of rates in Greece and is much higher than is usually assumed by these commonly used models in the financial markets.