Abstract
We investigate systematically the presence of jumps and the pricing of jump risk in interest rates and interest rate derivatives. We develop a dynamic term structure model with stochastic volatility and jumps in both level and slope of the term structure. We estimate the model on an extensive panel data set of Eurodollar futures and options on Eurodollar futures using Bayesian MCMC methods. Jumps significantly affect the tails of the conditional risk-neutral and physical distributions of interest rates, making jumps important for pricing and risk management of interest rate derivatives. Jump risk premia increase the implied volatility of OTM options by a sizable amount.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
