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    Information in the term structure of yield curve volatility

    Cieslak, A. and Povala, Pavol (2013) Information in the term structure of yield curve volatility. Working Paper. Birkbeck College, University of London, London, UK.

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    Abstract

    We study information in the volatility of US Treasuries. We propose a no-arbitrage term structure model with a stochastic covariance of risks in the economy, and estimate it using high-frequency data and options. We identify volatilities of the expected short rate and of the term premium. Volatility of short rate expectations rises ahead of recessions and during stress in financial markets, while term premium volatility increases in the aftermath. Volatile short rate expectations predict economic activity independently of the term spread at horizons up to one year, and are related to measures of monetary policy uncertainty. The term premium volatility comoves with a more general level of economic policy uncertainty. We also study channels through which volatility affects model-based inference about the yield curve.

    Metadata

    Item Type: Monograph (Working Paper)
    Keyword(s) / Subject(s): interest rate risk, realized yield covariance matrix, affine models, macro uncertainty, liquidity
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Research Centre: Applied Macroeconomics, Birkbeck Centre for
    Depositing User: Pavol Povala
    Date Deposited: 17 Sep 2013 10:53
    Last Modified: 06 Dec 2016 14:50
    URI: http://eprints.bbk.ac.uk/id/eprint/8153

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