A Nonparametric View of the Role of Jumps to Interest Rates

55 Pages Posted: 10 Nov 2000

See all articles by Michael S. Johannes

Michael S. Johannes

Graduate School of Business, Columbia University

Date Written: July 15, 2000

Abstract

This paper provides an empirical analysis of the role of jumps in continuous-time models of the short rate. A diagnostic is developed to relate the failure of single and certain multi-factor models to the presence of unaccounted for jump-type movements. I introduce a nonparametric jump-diffusion model and develop an estimation methodology, which is justified using Monte Carlo simulations. The results point toward a dominant role for jumps in determining the dynamics of the short rate relative to standard diffusion components. An approximate filtering algorithm estimates jump times and sizes, providing further insight into the role of jumps. Jumps appear to be a mechanism through which fundamental information regarding the state of the macroeconomy enters the term-structure. Last, I investigate the implications of jumps for the default free, zero coupon term structure of interest rates.

Suggested Citation

Johannes, Michael Slater, A Nonparametric View of the Role of Jumps to Interest Rates (July 15, 2000). Available at SSRN: https://ssrn.com/abstract=244571 or http://dx.doi.org/10.2139/ssrn.244571

Michael Slater Johannes (Contact Author)

Graduate School of Business, Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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