Publication Type

Journal Article

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

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

http://doi.org/10.1016/j.jbankfin.2004.09.004

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