Jump-Diffusion Processes and the Bond Markets

HBS Working Paper No. 95-034

Posted: 20 Dec 1998

See all articles by Sanjiv Ranjan Das

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business

Abstract

This paper develops models of the term structure when the short rate follows a jump-diffusion process. An empirical implementation demonstrates that jump-diffusions better explain interest rate behavior than pure diffusion models. The fit is shown to be improved by an augmented jump-diffusion time varying volatility model proposed here. The effect of skewness and kurtosis on the term structure of interest rates is analyzed. The economic implications of jump activity are explored with the analysis of changes in Federal Reserve target rates and their relationship to the term structure.

JEL Classification: G13

Suggested Citation

Das, Sanjiv Ranjan, Jump-Diffusion Processes and the Bond Markets. HBS Working Paper No. 95-034, Available at SSRN: https://ssrn.com/abstract=5912

Sanjiv Ranjan Das (Contact Author)

Santa Clara University - Leavey School of Business ( email )

Department of Finance
316M Lucas Hall
Santa Clara, CA 95053
United States

HOME PAGE: http://srdas.github.io/

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