Abstract
This article present a technique for nonparametrically estimating continuous-time interest rate stochastic process that are observed at discrete intervals. Although this technique had been brought up, that article just present to estimate interest rate stochastic process of one country. This article attempts to estimate two country’s interest rate stochastic process with each other. We illustrate the methodology by using daily eurodollars and euroyen data, from January 1979 to December 2002. Stanton (1997) finds that American short rate has mean reversion property, but he does not consider about foreign short rate. If foreign short rate can effect drift and diffusion of domestic short rate, we find some other conclusions different form Stanton (1997). When we consider foreign short rate in our model, Stanton’s (1997) conclusion is just only our model that given Japan short rate is zero. Eventually, we use our model to apply to value cross-currency interest rate cap and floor.