Publication Type
Journal Article
Version
acceptedVersion
Publication Date
10-2005
Abstract
This paper examines implied parameters from options on LIBOR futures. Jump-diffusion models are found to offer superior in-sample and out-of-sample performance when compared to their pure diffusion counterpart. The need to incorporate stochastic jump magnitudes into LIBOR dynamics is also documented. In addition, empirical evidence reveals that the jump component in LIBOR rates is important for pricing their derivatives. Furthermore, variation in jump risk often coincides with Federal Open Market Committee (FOMC) decisions and a small subset of macroeconomic announcements.
Keywords
Federal reserve, Jump-diffusion, LIBOR, Macroeconomic announcements
Discipline
Finance and Financial Management | Portfolio and Security Analysis
Research Areas
Finance; Quantitative Finance
Publication
Journal of Banking and Finance
Volume
29
Issue
10
First Page
2503
Last Page
2522
ISSN
0378-4266
Identifier
10.1016/j.jbankfin.2004.09.004
Publisher
Elsevier
Citation
LIM, Kian Guan; TING, Christopher; and WARACHKA, Mitch.
The Implied Jump Risk of LIBOR Rates. (2005). Journal of Banking and Finance. 29, (10), 2503-2522.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/2637
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1016/j.jbankfin.2004.09.004