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Jumps in Bond Yields at Known Times

Author

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  • Don H. Kim
  • Jonathan H. Wright

Abstract

We construct a no-arbitrage term structure model with jumps in the entire state vector at deterministic times but of random magnitudes. Jump risk premia are allowed for. We show that the model implies a closed-form representation of yields as a time-inhomogenous affine function of the state vector. We apply the model to the term structure of US Treasury rates, estimated at the daily frequency, allowing for jumps on days of employment report announcements. Our model can match the empirical fact that the term structure of interest rate volatility has a hump-shaped pattern on employment report days (but not on other days). The model also produces patterns in bond risk premia that are consistent with the empirical finding that much of the time-variation in excess bond returns accrues at times of important macroeconomic data releases.

Suggested Citation

  • Don H. Kim & Jonathan H. Wright, 2014. "Jumps in Bond Yields at Known Times," NBER Working Papers 20711, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20711
    Note: TWP
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    File URL: http://www.nber.org/papers/w20711.pdf
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    References listed on IDEAS

    as
    1. Kim, Don H. & Orphanides, Athanasios, 2012. "Term Structure Estimation with Survey Data on Interest Rate Forecasts," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(01), pages 241-272, April.
    2. Monika Piazzesi, 2001. "An Econometric Model of the Yield Curve with Macroeconomic Jump Effects," NBER Working Papers 8246, National Bureau of Economic Research, Inc.
    3. Piazzesi, Monika, 2001. "An Econometric Model of the Yield Curve With Macroeconomic Jump Effects," University of California at Los Angeles, Anderson Graduate School of Management qt5946p7hn, Anderson Graduate School of Management, UCLA.
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    Cited by:

    1. Martin Keller-Ressel & Thorsten Schmidt & Robert Wardenga, 2018. "Affine processes beyond stochastic continuity," Papers 1804.07556, arXiv.org.
    2. repec:eee:finana:v:52:y:2017:i:c:p:119-129 is not listed on IDEAS

    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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