Jumps in Bond Yields at Known Times

48 Pages Posted: 9 Dec 2014

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 2 versions of this paper

Date Written: June 17, 2016

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-inhomogeneous affine function of the state vector, and derive other theoretical implications. We apply the model to the term structure of U.S. 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.

Keywords: Term structure models, bond yields, jumps, news announcements, bond risk premia

JEL Classification: C32, E43, G12

Suggested Citation

Kim, Don H. and Wright, Jonathan H., Jumps in Bond Yields at Known Times (June 17, 2016). FEDS Working Paper No. 2014-100r1, Available at SSRN: https://ssrn.com/abstract=2534546 or http://dx.doi.org/10.2139/ssrn.2534546

Don H. Kim (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jonathan H. Wright

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

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