The Jump Component of the Volatility Structure of Interest Rate Futures Markets: an International Comparison

We propose a generalization of the Shirakawa (1991) model to capture the jump component in fixed income markets. The model is formulated under the Heath, Jarrow and Morton (1992) framework, and allows the presence of a Wiener noise and a finite number of Poisson noises, each associated with a time deterministic volatility function. We derive the evolution of the futures price and use this evolution to estimate the model parameters via the likelihood transformation technique of Duan (1994). We apply the method to the short term futures contracts traded on CME, SFE, LIFFE and TIFFE, and find that each market is characterized by very different behaviour.