Volatility and Jump Risk Premia in Emerging Market Bonds
IMF Working Papers, July 1, 2007
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- Volatility and Jump Risk Premia in Emerging Market Bonds
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Bibliographic details
- Authors: John J Matovu
- Published: July 1, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451867367.001
Summary
- Strong evidence that interest rates and bond yield movements exhibit both stochastic volatility and unanticipated jumps.
- Frequent jumps raise the question whether a premium for jump risk is embedded in observed bond yields.
- The paper identifies a class of jump-diffusion models that successfully approximate the term structure of interest rates of emerging markets.
- Parameters of the term structure are reconciled with associated bond yields by estimating volatility and jump risk premia in highly volatile markets.
Methods and Model Evaluation
- Estimation approach: simulated method of moments (SMM).
- Model class: jump-diffusion models with stochastic volatility and unanticipated jumps.
- Finding on model adequacy: all variants of models that do not incorporate stochastic volatility and unanticipated jumps cannot generate the non-normalities consistent with observed interest rates.
Key Quantitative Results
- Jumps occur (8,10) times a year in Argentina and Brazil, respectively.
- The size and variance of these jumps is reported as statistically significant.
- Pages: 25
- Volume: 2007
- Issue: 172
- Series: Working Paper No. 2007/172
- DOI: https://doi.org/10.5089/9781451867367.001
- Stock No: WPIEA2007172
- ISBN: 9781451867367
- ISSN: 1018-5941
- Publication date: July 1, 2007
Subject Areas and Keywords
- Subject: Asset prices, Interest rate modelling, Market interest rates, Short term interest rates, Yield curve
- Keywords: Brady bond, risk premium, stochastic model, time series, WP
Source: "Volatility and Jump Risk Premia in Emerging Market Bonds", IMF Working Paper (2007/172) by John J Matovu.
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