Jump-Diffusion Processes and the Term Structure of Interest Rates
The term structure is investigated using an extension of the Cox, Ingersoll, and Ross model when state variables and production technologies follow jump-diffusion processes. In the presence of jump diffusions, the authors find: (1) R. Merton's multi-beta CAPM does not hold in general; (2) D. Breeden's single consumption beta does not hold; (3) traditional expectations theory of the term structure is not consistent with equilbrium; and (4) investors with logarithmic utility will hedge movements in the investment opportunities set. , Copyright 1988 by American Finance Association.
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Volume (Year): 43 (1988)
Issue (Month): 1 (March)
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