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Poisson-Guassian Processes and the Bond Markets

  • Sanjiv R. Das

That interest rates move in a discontinuous manner is no surprise to participants in the bond markets. This paper proposes and estimates a class of Poisson-Gaussian processes that allow for jumps in interest rates. Estimation is undertaken using exact continuous-time and discrete-time estimators. Analytical derivations of the characteristic functions, moments and density functions of jump-diffusion stochastic process are developed and employed in empirical estimation. These derivations are general enough to accommodate any jump distribution. We find that jump processes capture empirical features of the data which would not be captured by diffusion models. The models in the paper enable an assessment of the impact of Fed activity and day-of-week effects on the stochastic process for interest rates. There is strong evidence that existing diffusion models would be well-enhanced by jump processes.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6631.

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Date of creation: Jul 1998
Date of revision:
Handle: RePEc:nbr:nberwo:6631
Note: AP
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  1. David Backus & Silverio Foresi & Liuren Wu, 1997. "Macroeconomic Foundations of Higher Moments in Bond Yields," New York University, Leonard N. Stern School Finance Department Working Paper Seires 96-10, New York University, Leonard N. Stern School of Business-.
  2. Brenner, Robin J. & Harjes, Richard H. & Kroner, Kenneth F., 1996. "Another Look at Models of the Short-Term Interest Rate," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 85-107, March.
  3. Heath, David & Jarrow, Robert & Morton, Andrew, 1990. "Bond Pricing and the Term Structure of Interest Rates: A Discrete Time Approximation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(04), pages 419-440, December.
  4. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  5. Philippe Jorion, 1988. "On Jump Processes in the Foreign Exchange and Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 1(4), pages 427-445.
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