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Linear-quadratic term structure models - Toward the understanding of jumps in interest rates

  • Jiang, George
  • Yan, Shu
Registered author(s):

We study linear-quadratic term structure models with random jumps in the short rate process where the jump arrival rate follows a stochastic process. Empirical results based on the US data show that incorporating stochastic jump intensity significantly improves model fit to the dynamics of both interest rate and volatility term structure. Our results also show that jump intensity is negatively correlated with interest rate changes and the average size is larger on the downside than upside. Examining the relation between jump intensity and macroeconomic shocks, we find that at monthly frequency, jumps are neither triggered by nor predictive of changes in macroeconomic variables. At daily frequency, however, we document interesting patterns for jumps associated with information shocks.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 33 (2009)
Issue (Month): 3 (March)
Pages: 473-485

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Handle: RePEc:eee:jbfina:v:33:y:2009:i:3:p:473-485
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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