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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Jumps in Bond Yields at Known Times
Don H. Kim
Jonathan H. Wright
Abstract

We construct a no-arbitrage term structure model with jumps in the entire state vector at deterministic times but of random magnitudes. Jump risk premia are allowed for. We show that the model implies a closed-form representation of yields as a time-inhomogeneous affine function of the state vector, and derive other theoretical implications. We apply the model to the term structure of US Treasury rates, estimated at the daily frequency, allowing for jumps on days of employment report announcements. Our model can match the empirical fact that the term structure of interest rate volatility has a hump-shaped pattern on employment report days (but not on other days). The model also produces patterns in bond risk premia that are consistent with the empirical finding that much of the time-variation in excess bond returns accrues at times of important macroeconomic data releases.


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Don H. Kim & Jonathan H. Wright, Jumps in Bond Yields at Known Times, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2014-100, 17 Nov 2014, revised 01 Jun 2016.
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