Continuous time models of interest rate: testing peso-dollar exchange rate.

Abstract

As an extension of the article by Núñez, De la Cruz and Ortega (2007), different parametric models with jumps are tested with the methodology developed by Ait-Sahalia and Peng (2006), based on the transition function. Data analyzed are the peso-dollar exchange rate. The idea is to implement continuous-time parametric models for the peso-dollar exchange rate. The results confirm that the proposed continuous time models are not good enough to explain the behavior that describes the peso-dollar exchange rate. However, considering some continuous time models with Poisson jumps is possible to describe such behavior.