A Jump-Diffusion Yield-Factor Model of Interest Rates
46 Pages Posted: 10 May 2010
Date Written: March 5, 2001
In this paper, the Federal Funds Rate Target and the one-year T-Bill are the two yield-factors explaining the movements of the term structure, Using Duffie and Kan (1996) approach, the two rates are consistently modeled and an affine model of the term structure results that is able to incorporate the Federal Open Market Committee discontinuous moves. An explicit formula for the zero-coupon bond price is derived and the model presents good fit to the January 1990-December 2000 monthly U.S. term structure. The factors level, slope and curvature are respectively identified as the 1-year T-Bill, the Federal Funds Rate Target and their spread.
Keywords: Exponential affine model, Discontinuous short-rate target, monetary policy risk
JEL Classification: E43, E52, G13
Suggested Citation: Suggested Citation