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

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  • Manuel Moreno
  • Juan I. Peña

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 jumps component is not included. However, the pricing of put options on bonds presents indeterminacies.

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File URL: http://www.econ.upf.edu/docs/papers/downloads/191.pdf
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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 191.

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Date of creation: Nov 1996
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Handle: RePEc:upf:upfgen:191

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Web page: http://www.econ.upf.edu/

Related research

Keywords: Jump-diffusion processes; interbank interest rates; option pricing;

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References

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  1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  2. 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 1209-27, July.
  3. Brennan, Michael J. & Schwartz, Eduardo S., 1980. "Analyzing Convertible Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(04), pages 907-929, November.
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Cited by:
  1. Enric Valor & Hipòlit Torró & Vicente Meneu, 2001. "Single Factor Stochastic Models With Seasonality Applied To Underlying Weather Derivatives Variables," Working Papers. Serie EC 2001-22, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  2. Henri Pagès, 1999. "Interbank interest rates and the risk premium," BIS Working Papers 81, Bank for International Settlements.

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