This thesis consists of two related parts. In the first part we conduct an empirical examination of the dynamics of Australian interest rates of six different maturities, covering the whole yield curve. This direct study of the long rates is quite novel. We use maximum likelihood estimation on a variety of models and find some results that are in stark contrast to previous studies. We estimate Poisson-jump diffusion (PJD) models and find very strong evidence for the existence of jumps in all daily interest rate series. We find that the PJD model fits short-rate data significantly better than a Bernoulli-jump diffusion model. We also estimate the CKLS model for our data and find that the only model not rejected for all six maturities is the CEV model in stark contrast to previous findings. Also, we find that the elasticity of variance estimate in the CKLS model is much higher for the short-rates than for the longer rates where the estimate is only about 0.25, indicating that different dynamics seem to be at work for different maturities. We also found that adding jumps to the simple diffusion model gives a larger improvement than comes from going from the simple diffusion to the CKLS model. In the second part of the thesis we examine the Flesaker and Hughston (FH) term structure model. We derive the dynamics of the short rate under both the original measure and the risk-neutral measure, and show that some criticisms of the bounds for the short rate may not be significant in actual applications. We also derive the dynamics of bond prices in the FH model and compare them to the HJM model. We also extend the FH model by allowing the martingale to follow a jump-diffusion process, rather than just a diffusion process. We derive the unique change of measure that guarantees the family of bond prices is arbitrage-free. We derive prices for caps and swaptions, and extend the results to include Bermudan swaptions and show how to price options with the jump-diffusion version of the FH model.
| Identifer | oai:union.ndltd.org:ADTP/215495 |
| Date | January 2006 |
| Creators | O???Brien, Peter, Banking & Finance, Australian School of Business, UNSW |
| Publisher | Awarded by:University of New South Wales. School of Banking and Finance |
| Source Sets | Australiasian Digital Theses Program |
| Language | English |
| Detected Language | English |
| Rights | Copyright Peter O???Brien, http://unsworks.unsw.edu.au/copyright |
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