Abstract:
This paper estimates a model of interest rate dynamics containing multi-factor Wiener
and single-factor Poisson jump volatility components. Delta from the highly liquid but short terrn
futures markets are used. The difficult numerical problem of estimating such multi-factor models is
resolved by using a genetic algorithm to carry out the optimization procedure. It is established that the
multi-factor Wiener volatility components are adequate to model the interest rate dynamics without
the need to incorporate Poisson jump components, the existence of which would create difficulties in
the practical use of interest rate models.
