The dynamics of the unobservable quot;shortquot; or quot;instantaneousquot; rate of interest are frequently estimated using a proxy. We show how the biases resulting from this practice (the quot;proxy problemquot;) are related to the derivatives of the proxy with respect to the short rate and...

The dynamics of the unobservable short rate are frequently estimated directly using a proxy. We examine the biases resulting from this practice (the quot;proxy problemquot;). Analytic results show that the proxy problem is not economically significant for single-factor affine models. In the...

Virtually all existing continuous-time, single-factor term structure models are based on a short rate process that has a linear drift function. However, there is no strong a priori argument in favor of linearity, and Stanton (1997) and Ait-Sahalia (1996), employing nonparametric estimation...

We study the implementability of Black's (1988) elegant discounting rule. The rule overcomes thorny problems that traditional valuation approaches struggle with, namely identifying the market portfolio, measuring project risk, and assessing the market risk premium. We offer new theory, showing...