The Implied Jump Risk of LIBOR Rates

The Implied Jump Risk of LIBOR Rates

This paper examines implied parameters from options on LIBOR futures. Jump-diffusion models are found to offer superior in-sample and out-of-sample performance when compared to their pure diffusion counterpart. The need to incorporate stochastic jump magnitudes into LIBOR dynamics is also documented...

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Bibliographic Details
Main Authors: LIM, Kian Guan, TING, Christopher, WARACHKA, Mitch
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2005
Subjects:
Federal reserve
Jump-diffusion
LIBOR
Macroeconomic announcements
Finance and Financial Management
Portfolio and Security Analysis
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/2637
https://ink.library.smu.edu.sg/context/lkcsb_research/article/3636/viewcontent/ImpliedJumpRiskLIBORrates_2005.pdf
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Institution: Singapore Management University
Language: English
Description
Summary:This paper examines implied parameters from options on LIBOR futures. Jump-diffusion models are found to offer superior in-sample and out-of-sample performance when compared to their pure diffusion counterpart. The need to incorporate stochastic jump magnitudes into LIBOR dynamics is also documented. In addition, empirical evidence reveals that the jump component in LIBOR rates is important for pricing their derivatives. Furthermore, variation in jump risk often coincides with Federal Open Market Committee (FOMC) decisions and a small subset of macroeconomic announcements.

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