The Jump Component of the Volatility Structure of Interest Rate Futures Markets: An International Comparison

Publication Type:
Journal Article
Journal of Futures Markets, 2003, 23 (12), pp. 1125 - 1158
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We propose a generalization of the Shirakawa (1991) model to capture the jump component in fixed-income markets. The model is formulated under the Heath, Jarrow, & Morton (1992) framework, and allows the presence of a Wiener noise and a finite number of Poisson noises, each associated with a time deterministic volatility function. We derive the evolution of the futures price and use this evolution to estimate the model parameters via the likelihood transformation technique of Duan (1994). We apply the method to the short-term futures contracts traded on CME, SFE, LIFFE, and TIFFE, and find that each market is characterized by very different behavior. © 2003 Wiley Periodicals, Inc.
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