Michael Johannes

The Statistical and Economic Role of Jumps in Continuous-Time Interest Rate Models

Abstract:
This paper analyzes the role of jumps in continuous-time short rate models. I first develop a test to detect jump-induced misspecification and, using Treasury bill rates, find evidence for the presence of jumps. Second, I specify and estimate a nonparametric jump-diffusion model. Results indicate that jumps play an important statistical role. Estimates of jump times and sizes indicate that unexpected news about the macroeconomy generates the jumps. Finally, I investigate the pricing implications of jumps. Jumps generally have a minor impact on yields, but they are important for pricing interest rate options.

Source: The Journal of Finance
Exact Citation:
Johannes, Michael. "The Statistical and Economic Role of Jumps in Continuous-Time Interest Rate Models." The Journal of Finance 59 (2004): 227-260.
Volume: 59
Pages: 227-260
Date: 2004