Jump-diiusion Term Structure and It^ O Conditional Moment Generator
نویسنده
چکیده
This paper develops a Multivariate Weighted Nonlinear Least Square estimator for a jumpdi usion interest rate model (hereafter MWNLS-JD), which also admits a closed form solution to bond price under an equilibrium martingale pricing theorem. The instantaneous interest rate is modeled as a mixture of a continuous square-root di usion and a discrete Poisson jump process, with the jump sizes uniformly distributed. This speci cation extends the existing jump-di usion literature, and helps to better explain the term structure volatility. Using the Generalized Itô's Lemma, we can analytically derive the rst four conditional moments, which form the basis of our MWNLS-JD estimation. A diagnostic test can also be constructed from the tted moment conditions. The market prices of di usion and jump risks are calibrated by minimizing the pricing errors between an implied yield curve and a target yield curve. The empirical result suggests that the jump augmentation is statistically very signi cant, and the bond pricing formula can be easily implemented. Local comparative statics is also conducted to elucidate some economic intuitions.
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