A jump-diffusion model for the euro overnight rate
In this work we introduce a jump-diffusion process for the euro overnight rate (the European over night index average) that is able to capture the main characteristics of this rate: (i) dynamics constrained to remain in the corridor of official rates fixed by the European Central Bank; (ii) mean reversion towards the official rate on main refinancing operations; and (iii) highly discontinuous pattern (with jumps), also without variations in the official rate. After calibrating the model parameters on historical data, we implement the model to price an overnight indexed swap. Finally, a comparison between our model and the most common short-term interest rate models is presented.
Volume (Year): 12 (2012)
Issue (Month): 1 (December)
|Contact details of provider:|| Web page: http://www.tandfonline.com/RQUF20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/RQUF20|
When requesting a correction, please mention this item's handle: RePEc:taf:quantf:v:12:y:2012:i:1:p:149-165. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If references are entirely missing, you can add them using this form.