Paper #191

Title:

On the term structure of Interbank interest rates: Jump-diffusion processes and option pricing

Authors:

Manuel Moreno and Juan I. Peña

Date:

November 1996

Abstract:

In this paper we study the dynamic behavior of the term structure of Interbank interest rates and the pricing of options on interest rate sensitive securities. We posit a generalized single factor model with jumps to take into account external influences in the market. Daily data is used to test for jump effects. Qualitative examination of the linkage between Monetary Authorities' interventions and jumps are studied. Pricing results suggests a systematic underpricing in bonds and call options if the jumps component is not included. However, the pricing of put options on bonds presents indeterminacies.

Keywords:

Jump-diffusion processes, interbank interest rates, option pricing

JEL codes:

C51, E43, G12

Area of Research:

Finance and Accounting

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