Stochastic Volatility and Jumps in Interest Rates: An International Analysis

43 Pages Posted: 25 Mar 2005

See all articles by Ren-Raw Chen

Ren-Raw Chen

Fordham University - Gabelli School of Business

Louis Scott

Morgan Stanley - United Kingdom Office

Date Written: September 6, 2004

Abstract

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

Suggested Citation

Chen, Ren-Raw and Scott, Louis, Stochastic Volatility and Jumps in Interest Rates: An International Analysis (September 6, 2004). Available at SSRN: https://ssrn.com/abstract=686985 or http://dx.doi.org/10.2139/ssrn.686985

Ren-Raw Chen (Contact Author)

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
Bronx, NY 10458
United States

Louis Scott

Morgan Stanley - United Kingdom Office ( email )

Cabot Square, Canary Whart
London, E14 4QW
United Kingdom
44 207 425 6581 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
321
Abstract Views
1,786
rank
92,950
PlumX Metrics