Jump-Diffusion Processes and the Bond Markets
HBS Working Paper No. 95-034
Posted: 20 Dec 1998
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: 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
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