Ahn is from the University of Texas-Dallas and the School of Business, University of Wisconsin-Eau Claire. Thompson is from the Graduate School of Business, University of Wisconsin-Madison. We wish to thank J. Detemple, R. Green, K. Singleton, and S. Sundaresan, as well as an anonymous referee, for valuable comments.
Jump-Diffusion Processes and the Term Structure of Interest Rates
Article first published online: 30 APR 2012
1988 The American Finance Association
The Journal of Finance
Volume 43, Issue 1, pages 155–174, March 1988
How to Cite
AHN, C. M. and THOMPSON, H. E. (1988), Jump-Diffusion Processes and the Term Structure of Interest Rates. The Journal of Finance, 43: 155–174. doi: 10.1111/j.1540-6261.1988.tb02595.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
The authors investigate the term structure of interest rates when the underlying state variables and production technologies follow the jump-diffusion processes. Even in some cases where the traditional expectations theory about the term structure is consistent with general equilibrium under diffusion processes, the traditional theory is not consistent under jump-diffusion processes. It is shown that bond prices are strictly higher under jump risks than otherwise and that consumers with logarithmic utility functions will develop hedge portfolios in the presence of jump diffusion.