The Statistical and Economic Role of Jumps in Continuous-Time Interest Rate Models
This paper analyzes the role of jumps in continuous-time short rate models. I first develop a test to detect jump-induced misspecification and, using Treasury bill rates, find evidence for the presence of jumps. Second, I specify and estimate a nonparametric jump-diffusion model. Results indicate that jumps play an important statistical role. Estimates of jump times and sizes indicate that unexpected news about the macroeconomy generates the jumps. Finally, I investigate the pricing implications of jumps. Jumps generally have a minor impact on yields, but they are important for pricing interest rate options. Copyright 2004 by The American Finance Association.
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Volume (Year): 59 (2004)
Issue (Month): 1 (02)
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