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The Statistical and Economic Role of Jumps in Continuous‐Time Interest Rate Models

The Statistical and Economic Role of Jumps in Continuous‐Time Interest Rate Models ABSTRACT This paper analyzes the role of jumps in continuous‐time short rate models. I first develop a test to detect jump‐induced misspecification and, using Treasury bill rates, find evidence for the presence of jumps. Second, I specify and estimate a nonparametric jump‐diffusion model. Results indicate that jumps play an important statistical role. Estimates of jump times and sizes indicate that unexpected news about the macroeconomy generates the jumps. Finally, I investigate the pricing implications of jumps. Jumps generally have a minor impact on yields, but they are important for pricing interest rate options. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

The Statistical and Economic Role of Jumps in Continuous‐Time Interest Rate Models

The Journal of Finance , Volume 59 (1) – Feb 1, 2004

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References (91)

Publisher
Wiley
Copyright
© American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6321.2004.00632.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT This paper analyzes the role of jumps in continuous‐time short rate models. I first develop a test to detect jump‐induced misspecification and, using Treasury bill rates, find evidence for the presence of jumps. Second, I specify and estimate a nonparametric jump‐diffusion model. Results indicate that jumps play an important statistical role. Estimates of jump times and sizes indicate that unexpected news about the macroeconomy generates the jumps. Finally, I investigate the pricing implications of jumps. Jumps generally have a minor impact on yields, but they are important for pricing interest rate options.

Journal

The Journal of FinanceWiley

Published: Feb 1, 2004

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