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Estimating Single Factor Jump Diffusion Interest Rate Models

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  • Ghulam Sorwar

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    (Business School Nottingham University)

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    Abstract

    Recent empirical studies have demonstrated that behaviour of interest rate processes can be better explained if standard diffusion processes are augmented with jumps in the interest rate process. In this paper we examine the performance of both linear and non-linear one factor CKLS model in the presence of jumps. We conclude that empirical features of interest rates not captured by standard diffusion processes are captured by models with jumps and that the linear CKLS model provides sufficient explanation of the data.

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    File URL: http://repec.org/sce2005/up.20569.1105733853.pdf
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    Bibliographic Info

    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 56.

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    Date of creation: 11 Nov 2005
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    Handle: RePEc:sce:scecf5:56

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    Web page: http://comp-econ.org/
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    Keywords: term structure; jumps; Bayesian; MCMC;

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    1. Andersen, Torben G. & Lund, Jesper, 1997. "Estimating continuous-time stochastic volatility models of the short-term interest rate," Journal of Econometrics, Elsevier, vol. 77(2), pages 343-377, April.
    2. Ait-Sahalia, Yacine, 1996. "Testing Continuous-Time Models of the Spot Interest Rate," Review of Financial Studies, Society for Financial Studies, vol. 9(2), pages 385-426.
    3. Ahn, Dong-Hyun & Gao, Bin, 1999. "A Parametric Nonlinear Model of Term Structure Dynamics," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 721-62.
    4. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, vol. 53(2), pages 363-84, March.
    5. Clifford A. Ball & Walter N. Torous, 1999. "The Stochastic Volatility of Short-Term Interest Rates: Some International Evidence," Journal of Finance, American Finance Association, vol. 54(6), pages 2339-2359, December.
    6. Eraker, Bjorn, 2001. "MCMC Analysis of Diffusion Models with Application to Finance," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 177-91, April.
    7. Ball, Clifford A. & Torous, Walter N., 1983. "A Simplified Jump Process for Common Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(01), pages 53-65, March.
    8. Das, Sanjiv R., 2002. "The surprise element: jumps in interest rates," Journal of Econometrics, Elsevier, vol. 106(1), pages 27-65, January.
    9. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
    10. Conley, Timothy G, et al, 1997. "Short-Term Interest Rates as Subordinated Diffusions," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 525-77.
    11. Dong-Hyun Ahn & Robert F. Dittmar, 2002. "Quadratic Term Structure Models: Theory and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 243-288, March.
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