Can Interest Rate Volatility be Extracted from the Yield Curve ? A Test Of Unspanned Stochastic Volatility

@inproceedings{CollinDufresne2002CanIR,
  title={Can Interest Rate Volatility be Extracted from the Yield Curve ? A Test Of Unspanned Stochastic Volatility},
  author={Pierre Collin-Dufresne and Robert Michael Goldstein and Chris Stephen Jones},
  year={2002}
}
Most affine models of the term structure with stochastic volatility predict that the variance of the short rate is simultaneously a linear combination of yields and the quadratic variation of the spot rate. However, we find that the A1(3) model generates a time series for the variance state variable that is strongly negatively correlatedwith a GARCH estimate of the quadratic variation of the spot rate process. We then investigate affine models that exhibit ‘unspanned stochastic volatility (USV… CONTINUE READING

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19 1-year 13.34 13.18 13.20 13.25 2-year 14

  • RMSE (basis points) 6-month 11.33 > * 11.08 11.12…

61 4-year 17.35 17.65 17.26 17.25 5-year 17.71 18.02 17.61 17.61 7-year 17.67 17.99 17.58 17.59 10-year 17

  • RMSE (basis points) 6-month 6.70 6

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