Estimating value-at-risk under a Heath-Jarrow-Morton framework with jump

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Abstract

This article proposes a new methodology for measuring Value-at-Risk (hereafter VaR) using a model that incorporates both volatility and jumps. Heath-Jarrow-Morton (HJM) model has been used for the valuation of interest rate derivatives. This study extends the use of HJM model to the estimation VaR. This article specifically uses a two-factor HJM jumpdiffusion model for the computation. The study models the Eurodollar futures prices using its derivatives. In addition, this article uses a new volatility specification of Ze-To (2002) to construct the HJM dynamics. The result indicates that the VaR model using HJM jump-diffusion framework performs well in capturing the nonnormality and in providing accurate VaR forecasts in the in-sample and out-sample tests.

Original languageEnglish
Pages (from-to)2729-2741
Number of pages13
JournalApplied Economics
Volume44
Issue number21
DOIs
Publication statusPublished - Jul 2012

Scopus Subject Areas

  • Economics and Econometrics

User-Defined Keywords

  • HJM model
  • Interest rate modeling
  • Options pricing
  • Value-at-risk

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