In this paper, alternative interest rate processes are estimated for Korea using the Generalized Mothed of Moment(GMM). In line with the studies by Chan, Karolyi, Longstaff, and Sanders(1992) on U.S. data there seems to be a positive relation between interest rate level and volatility. However, it is found that mean-reverting plays an important role for the specification of interest rate dynamics in Korea.
In Addition, we investigate whether the result is robust to the changes in the short-rate data such as Certificate of Deposit(CD) and Call. We finds that call loan rate is not the adequate proxy for the short interest rate considering the correlations of interest rates in Korean money market. Using CD, this study support the square root process and Brennan and Schwartz model for the short-term interest model in Korean Bond market.
