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On the term structure of Interbank interest rates: Jump-diffusion processes and option pricing

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  • Manuel Moreno
  • Juan I. Peña

Abstract

In this paper we study the dynamic behavior of the term structure of Interbank interest rates and the pricing of options on interest rate sensitive securities. We posit a generalized single factor model with jumps to take into account external influences in the market. Daily data is used to test for jump effects. Qualitative examination of the linkage between Monetary Authorities' interventions and jumps are studied. Pricing results suggests a systematic underpricing in bonds and call options if the jumps component is not included. However, the pricing of put options on bonds presents indeterminacies.

Suggested Citation

  • Manuel Moreno & Juan I. Peña, 1996. "On the term structure of Interbank interest rates: Jump-diffusion processes and option pricing," Economics Working Papers 191, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfgen:191
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    1. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 5, pages 129-164, World Scientific Publishing Co. Pte. Ltd..
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    5. Dothan, L. Uri, 1978. "On the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 6(1), pages 59-69, March.
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    Cited by:

    1. Hipòlit Torró & Vicente Meneu & Enric Valor, 2003. "Single Factor Stochastic Models with Seasonality Applied to Underlying Weather Derivatives Variables," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 4(4), pages 6-17, March.
    2. Henri Pagès, 1999. "Interbank interest rates and the risk premium," BIS Working Papers 81, Bank for International Settlements.

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    More about this item

    Keywords

    Jump-diffusion processes; interbank interest rates; option pricing;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • 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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