Short rate dynamics with stochastic volatilities and jumps

ZHENG Ting-guo, LIU Jin-quan

Systems Engineering - Theory & Practice ›› 2012, Vol. 32 ›› Issue (11) : 2372-2380.

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Systems Engineering - Theory & Practice ›› 2012, Vol. 32 ›› Issue (11) : 2372-2380. DOI: 10.12011/1000-6788(2012)11-2372

Short rate dynamics with stochastic volatilities and jumps

  • ZHENG Ting-guo1, LIU Jin-quan2
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Abstract

This paper introduces stochastic volatility and jump factors into the short-rate models, and uses a method combining sequential parameter updating and particle filter to implement the estimation of both states and parameters. Then, we use this extended models to analyze the Chinese inter-bank short-term interest rate. The empirical results show that the short-rate has obvious features of stochastic volatility and jump, and the CIR-SV-J model is the best one for describing the short-rate dynamics. If any factor of stochastic volatility or jump is ignored, the model-fitting performance would be worse, and the mean-reversion feature could not be accurately identified. Finally, our results indicate that the stochastic volatility factor is relatively more important in modeling short-rate dynamics than the jump factor.

Key words

short-term interest rate / stochastic volatility / jumps / particle filter

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ZHENG Ting-guo , LIU Jin-quan. Short rate dynamics with stochastic volatilities and jumps. Systems Engineering - Theory & Practice, 2012, 32(11): 2372-2380 https://doi.org/10.12011/1000-6788(2012)11-2372

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