Quadratic term structure models with jumps in incomplete currency markets
We propose a multi-currency quadratic term structure model that allows for several sources of market incompleteness. A new feature of the model is the jump-quadratic dynamics of the exchange rates that simultaneously generate greater flexibility in the time-varying risk premium and excessive currency volatility. Our model empirically outperforms the complete market quadratic and affine multi-currency diffusion models. It accounts for the forward premium anomaly with reasonable market price of risks. The market incompleteness consists of idiosyncratic diffusion-like innovations and jump discontinuities. We find that the jumps dominate the variations in the currency returns and produce most of the excessive currency volatility.
|Date of creation:||29 Sep 2004|
|Contact details of provider:|| Postal: New Orleans, Louisiana 70148|
Phone: (504) 280-6485
Web page: http://www.uno.edu/~coba/econ/index.html
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:uno:wpaper:2004-04. 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: (Janet Murphy Crane)
If references are entirely missing, you can add them using this form.