Quadratic term structure models with jumps in incomplete currency markets
Additional contact information
Elton Daal: University of New Orleans
No 2004-04, Working Papers from University of New Orleans, Department of Economics and Finance
We propose a multi-currency quadratic term structure model that allows for several sources of market incompleteness. A new feature of the model is the jump-quadratic dynamics of the exchange rates that simultaneously generate greater flexibility in the time-varying risk premium and excessive currency volatility. Our model empirically outperforms the complete market quadratic and affine multi-currency diffusion models. It accounts for the forward premium anomaly with reasonable market price of risks. The market incompleteness consists of idiosyncratic diffusion-like innovations and jump discontinuities. We find that the jumps dominate the variations in the currency returns and produce most of the excessive currency volatility.
Keywords: Quadratic term structure; Incomplete markets; Jumps; Excess volatility (search for similar items in EconPapers)
JEL-codes: F31 E43 D52 C14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-ifn
References: Add references at CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to louisdl.louislibraries.org:80
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:uno:wpaper:2004-04
Access Statistics for this paper
More papers in Working Papers from University of New Orleans, Department of Economics and Finance Contact information at EDIRC.
Bibliographic data for series maintained by Janet Murphy Crane ().