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On the term structure of Interbank interest rates: jump-diffusion processes and option pricing

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  • Moreno, Manuel
  • Peña, Juan Ignacio

Abstract

In this paper we study the dynamic behavior of the term structure of Interbank interest rates and the pricing of options on interest rate sensitive securities. We posit a generalized single factor model with jumps to take into account external influences in the market. Daily data is used to test for jump effects. Qualitative examination of the linkage between Monetary Authorities interventions and jumps are studied. Pricing results suggests a systematic underpricing in bonds and call options if the jump component is not inc1uded. However, the pricing of put options on bonds presents indeterminacies.

Suggested Citation

  • Moreno, Manuel & Peña, Juan Ignacio, 1995. "On the term structure of Interbank interest rates: jump-diffusion processes and option pricing," DES - Working Papers. Statistics and Econometrics. WS 7074, Universidad Carlos III de Madrid. Departamento de Estadística.
    • Handle: RePEc:cte:wsrepe:7074
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    References listed on IDEAS

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    1. Chan, K C, et al, 1992. "An Empirical Comparison of Alternative Models of the Short-Term Interest Rate," Journal of Finance, American Finance Association, vol. 47(3), pages 1209-1227, July.
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    Cited by:

    1. Henri Pagès, 1999. "Interbank interest rates and the risk premium," BIS Working Papers 81, Bank for International Settlements.
    2. Hipòlit Torró & Vicente Meneu & Enric Valor, 2003. "Single Factor Stochastic Models with Seasonality Applied to Underlying Weather Derivatives Variables," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 4(4), pages 6-17, March.

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    More about this item

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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