Jumps in Bond Yields at Known Times

35 Pages Posted: 1 Dec 2014 Last revised: 5 Aug 2021

See all articles by Don H. Kim

Don H. Kim

Board of Governors of the Federal Reserve System

Jonathan H. Wright

Johns Hopkins University - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: November 2014

Abstract

We construct a no-arbitrage term structure model with jumps in the entire state vector at deterministic times but of random magnitudes. Jump risk premia are allowed for. We show that the model implies a closed-form representation of yields as a time-inhomogenous affine function of the state vector. We apply the model to the term structure of US Treasury rates, estimated at the daily frequency, allowing for jumps on days of employment report announcements. Our model can match the empirical fact that the term structure of interest rate volatility has a hump-shaped pattern on employment report days (but not on other days). The model also produces patterns in bond risk premia that are consistent with the empirical finding that much of the time-variation in excess bond returns accrues at times of important macroeconomic data releases.

Suggested Citation

Kim, Don H. and Wright, Jonathan H., Jumps in Bond Yields at Known Times (November 2014). NBER Working Paper No. w20711, Available at SSRN: https://ssrn.com/abstract=2532292

Don H. Kim (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Jonathan H. Wright

Johns Hopkins University - Department of Economics ( email )

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Baltimore, MD 21218-2685
United States

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