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The Jump Component of the Volatility Structure of Interest Rate Futures Markets: An International Comparison

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Author Info
To, Thuy Duong (University of Technology, Sydney)
Carl Chiarella

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Abstract

We propose a generalization of the Shirakawa (1991) model to capture the jump component in fixed income markets. The model is formulated under the Heath, Jarrow and Morton (1992) framework, and allows the presence of a Wiener noise and a finite number of Poisson noises, each associated with a time deterministic volatility function. We derive the evolution of the futures price and use this evolution to estimate the model parameters via the likelihood transformation technique of Duan (1994). We apply the method to the short term futures contracts traded on CME, SFE, LIFFE and TIFFE, and find that each market is characterized by very different behaviour.

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Publisher Info
Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 205.

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Date of creation: 04 Jun 2003
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Handle: RePEc:ecj:ac2003:205

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Related research
Keywords: term structure; Heath-Jarrow-Morton; Jump-diffusion; FIML; likelihood transformation; interest rate futures;

Find related papers by JEL classification:
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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  1. Carl Chiarella & Thuy-Duong Tô, 2006. "The Multifactor Nature of the Volatility of Futures Markets," Computational Economics, Springer, vol. 27(2), pages 163-183, May. [Downloadable!] (restricted)
  2. Carl Chiarella & Christina Nikitopoulos-Sklibosios & Erik Schlogl, 2005. "A Control Variate Method for Monte Carlo Simulations of Heath-Jarrow-Morton with Jumps," Research Paper Series 167, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
  3. Carl Chiarella & Erik Schlögl & Christina Nikitopoulos-Sklibosios, 2004. "A Markovian Defaultable Term Structure Model with State Dependent Volatilities," Research Paper Series 135, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
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  4. Thomas Busch & Bent Jesper Christensen & Morten Ørregaard Nielsen, 2006. "The Information Content of Treasury Bond Options Concerning Future Volatility and Price Jumps," Working Papers 1188, Queen's University, Department of Economics. [Downloadable!]
  5. Carl Chiarella & Christina Nikitopoulos-Sklibosios, 2004. "A Class of Jump-Diffusion Bond Pricing Models within the HJM Framework," Research Paper Series 132, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
    Other versions:
  6. Ram Bhar & Carl Chiarella & Thuy-Duong To, 2004. "Estimating the Volatility Structure of an Arbitrage-Free Interest Rate Model Via the Futures Markets," Finance 0409003, EconWPA. [Downloadable!]
  7. Carl Chiarella & Thuy-Duong To, 2005. "The Volatility Structure of the Fixed Income Market under the HJM Framework: A Nonlinear Filtering Approach," Research Paper Series 150, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
    Other versions:
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