Jump-diffusion processes and affine term structure models
Subtitle: additional closed-form approximate solutions, distributional assumptions for jumps, and parameter estimates
By: J. Benson Durham.
Series: Finance and economics discussion series ;; 2005-53; Finance and economics discussion series (Online) ;; 2005-53.
Publisher: Federal Reserve Board
Published: 2005
Place of publication: Washington, D.C
Language: eng
Format: Electronic resource
Description: "Affine term structure models in which the short rate follows a jump-diffusion process are difficult to solve, and the parameters of such models are hard to estimate.  Without analytical answers to the partial difference differential equation (PDDE) for bond prices implied by jump-diffusion processes, one must find a numerical solution to the PDDE or exactly solve an approximate PDDE.  Although the literature focuses on a single linearization technique to estimate the PDDE, this paper outlines alternative methods that seem to improve accuracy.  Also, closed-form solutions, numerical estimates, and closed-form approximations of the PDDE each ultimately depend on the presumed distribution of jump sizes, and this paper explores a broader set of possible densities that may be more consistent with intuition, including a bi-modal Gaussian mixture.  GMM and MLE of one- and two-factor jump-diffusion models produce some evidence for jumps, but sensitivity analyses suggest sizeable confidence intervals around the parameters"--Federal Reserve Board web site.
Notes: Also available in print.
Includes bibliographical references.
Title from PDF file as viewed on 12/8/2005.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.