Title Volatility and jump risk premia in emerging market bonds / prepared by John M. Matovu

Published [Washington, D.C.] : International Monetary Fund, Middle East and Central Asia Dept., ©2007

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Description 1 online resource (25 pages) : illustrations Series IMF working paper, 2227-8885 ; WP/07/172 IMF working paper ; WP/07/172. Contents I. Introduction; II. Model Specification; III. Econometric Approach; IV. Data Sources; V. Empirical Results; A. SNP Model for Interest Rates; B. Simple Model with Constant Volatility (CIR); C. Model with Stochastic Volatility (SV); D. Model with Varying Volatility and Jumps (SVJ); E. Volatility and Jump Risk Premia; VI. Conclusion; Appendix; 1. SNP Auxilliary Model; References; Tables; 1. SNP Density Estimation; 2. EMM Estimates of the Jump Diffusion Stochastic Model for Argentina; 3. EMM Estimates of the Jump Diffusion Stochastic Model for Brazil; 4. Volatility and Jump Risk Premia 5. Estimates and t-ratios of the Average SNP Score Components for Argentina6. Estimates and t-ratios of the Average SNP Score Components for Brazil; Figure; 1. SNP Sample Forecasts and Actual Data for Argentina and Brazil Summary There is strong evidence that interest rates and bond yield movements exhibit both stochastic volatility and unanticipated jumps. The presence of frequent jumps makes it natural to ask whether there is a premium for jump risk embedded in observed bond yields. This paper identifies a class of jump-diffusion models that are successful in approximating the term structure of interest rates of emerging markets. The parameters of the term structure of interest rates are reconciled with the associated bond yields by estimating the volatility and jump risk premia in highly volatile markets. Using the simulated method of moments (SMM), results suggest that all variants of models which do not take into account stochastic volatility and unanticipated jumps cannot generate the non-normalities consistent with the observed interest rates. Jumps occur (8,10) times a year in Argentina and Brazil, respectively. The size and variance of these jumps is also of statistical significance Bibliography Includes bibliographical references (pages 16-18) Notes Master and use copy. Digital master created according to Benchmark for Faithful Digital Reproductions of Monographs and Serials, Version 1. Digital Library Federation, December 2002. http://purl.oclc.org/DLF/benchrepro0212 MiAaHDL English digitized 2010 HathiTrust Digital Library committed to preserve pda MiAaHDL Print version record Subject Interest rates -- Econometric models Risk -- Econometric models Jump processes -- Econometric models Bonds -- Econometric models Bonds -- Econometric models Interest rates -- Econometric models Risk -- Econometric models Form Electronic book Author International Monetary Fund. Middle East and Central Asia Department. ISBN 1283513692 9781283513692 1451911890 9781451911893 1462379036 9781462379033 1452783411 9781452783413 9786613826145 6613826146

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