A jump-diffusion model for the euro overnight rate

Mattia Raudaschl

Quantitative Finance, 2012, vol. 12, issue 1, 149-165

Abstract: In this work we introduce a jump-diffusion process for the euro overnight rate (the European over night index average) that is able to capture the main characteristics of this rate: (i) dynamics constrained to remain in the corridor of official rates fixed by the European Central Bank; (ii) mean reversion towards the official rate on main refinancing operations; and (iii) highly discontinuous pattern (with jumps), also without variations in the official rate. After calibrating the model parameters on historical data, we implement the model to price an overnight indexed swap. Finally, a comparison between our model and the most common short-term interest rate models is presented.

Date: 2012
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DOI: 10.1080/14697688.2010.549142

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