Stochastic Volatility and Jumps in Interest Rates: An International Analysis
43 Pages Posted: 25 Mar 2005
Date Written: September 6, 2004
In this paper, we examine possible stochastic volatility and jumps in short-term interest rates for four major countries: US, UK, Germany and Japan. An econometric model with stochastic volatility and jumps in both rates and volatility is derived and fit to the daily data for futures interest rates in four major currencies and the model provides a better fit for the empirical distributions. The distributions for changes in Eurocurrency interest rate futures are leptokurtic with fat tails and an unusually large percentage of observations concentrated at zero. The implied volatilities for at-the-money options on interest rate futures reveal evidence of stochastic volatility, as well as jumps in volatility.
Keywords: Stochastic Volatility, Jumps, Interest Rates, International
JEL Classification: C5, F00, G12, G13, G15
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