Feldhütter, P., Schneider, Paul and Trolle, A. (2008) Jumps in Interest Rates and Pricing of Jump Risk - Evidence from the Eurodollar Market. In: 35th EFA Annual Meeting, Athens, Greece, 27-30 Aug, 2008. Published in: EFA 2008 Athens Meetings Paper

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Abstract

We investigate systematically the presence of jumps and the pricing of jump risk in interest rates and interest rate derivatives. We develop a dynamic term structure model with stochastic volatility and jumps in both level and slope of the term structure. We estimate the model on an extensive panel data set of Eurodollar futures and options on Eurodollar futures using Bayesian MCMC methods. Jumps significantly affect the tails of the conditional risk-neutral and physical distributions of interest rates, making jumps important for pricing and risk management of interest rate derivatives. Jump risk premia increase the implied volatility of OTM options by a sizable amount.

Item Type:	Conference Item (Paper)
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School
Journal or Publication Title:	EFA 2008 Athens Meetings Paper
Publisher:	European Finance Association
Official Date:	2008
Dates:	Date Event 2008 Published
Status:	Not Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access
Conference Paper Type:	Paper
Title of Event:	35th EFA Annual Meeting
Type of Event:	Conference
Location of Event:	Athens, Greece
Date(s) of Event:	27-30 Aug, 2008

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