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Junp‐Diffusion Interest Rate Process: An Empirical Examination

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  • Bing‐Huei Lin
  • Shih‐Kuo Yeh

Abstract

We investigate a jump‐diffusion process, which is a mixture of an O‐U process used by Vasicek (1977) and a compound Poisson jump process, for the term structure of interest rates. We develop a methodology for estimating the jump‐diffusion model and complete an empirical study in comparing the model with the Vasicek model, for the US money market interest rates. The results show that when the short‐term interest rate is low, both models predict an upward sloping term structure, with the jump‐diffusion model fitting the actual term structure quite well and the Vasicek model overestimating significantly. When the short‐term interest rate is high, both models predict a downward sloping term structure, with the jump‐diffusion model underestimating the actual term structure more significantly than the Vasicek model.

Suggested Citation

  • Bing‐Huei Lin & Shih‐Kuo Yeh, 1999. "Junp‐Diffusion Interest Rate Process: An Empirical Examination," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(7‐8), pages 967-995, September.
    • Handle: RePEc:bla:jbfnac:v:26:y:1999:i:7-8:p:967-995
    DOI: 10.1111/1468-5957.00282
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    Cited by:

    1. Emmanuel Coffie, 2021. "Numerical approximation of hybrid Poisson-jump Ait-Sahalia-type interest rate model with delay," Papers 2107.03712, arXiv.org, revised Jul 2021.
    2. Qian Li & Li Wang, 2023. "Option pricing under jump diffusion model," Papers 2305.10678, arXiv.org.
    3. Emmanuel Coffie, 2021. "Delay stochastic interest rate model with jump and strong convergence in Monte Carlo simulations," Papers 2103.07651, arXiv.org, revised Jul 2021.

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