Jumps in Bond Yields at Known Times

48 Pages Posted: 9 Jul 2021

See all articles by Don H. Kim

Don H. Kim

Board of Governors of the Federal Reserve System

Jonathan H. Wright

affiliation not provided to SSRN

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-inhomogeneous affine function of the state vector, and derive other theoretical implications. 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.

JEL Classification: C32, E43, G12

Suggested Citation

Kim, Don H. and Wright, Jonathan H., Jumps in Bond Yields at Known Times (November, 2014). FEDS Working Paper No. 2014-100, Available at SSRN: https://ssrn.com/abstract=3877859

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

affiliation not provided to SSRN

No Address Available

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