The Role of the Risk-Neutral Jump Size Distribution in Single-Factor Interest Rate ModelsReport as inadecuate




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Abstract and Applied Analysis - Volume 2015 2015, Article ID 805695, 8 pages -

Research ArticleDepartamento de Economía Aplicada, Facultad de Ciencias Económicas y Empresariales, Universidad de Valladolid, Avenida del Valle de Esgueva 6, 47011 Valladolid, Spain

Received 23 December 2014; Accepted 6 May 2015

Academic Editor: Benito M. Chen-Charpentier

Copyright © 2015 L. Gómez-Valle and J. Martínez-Rodríguez. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

We obtain a result that relates the risk-neutral jump size of interest rates with yield curve data. This function is unobservable; therefore, this result opens a way to estimate the jump size directly from data in the markets together with the risk-neutral drift and jump intensity estimations. Then, we investigate the finite sample performance of this approach with a test problem. Moreover, we analyze the effect of estimating the risk-neutral jump size instead of assuming that it is artificially absorbed by the jump intensity, as usual in the interest rate literature. Finally, an application to US Treasury Bill data is also illustrated.





Author: L. Gómez-Valle and J. Martínez-Rodríguez

Source: https://www.hindawi.com/



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