Pricing and Hedging Volatility Risk in Fixed Income Markets ∗

@inproceedings{Joslin2014PricingAH,
  title={Pricing and Hedging Volatility Risk in Fixed Income Markets ∗},
  author={Scott Joslin},
  year={2014}
}
In this paper I show that, with sufficient flexibility in the covariance structure of the risk factors and the market prices of these risks, a low-dimensional term structure model can simultaneously price bonds and related options. I find that a component of volatility risk largely unrelated to the shape of the yield curve is a determinant of expected excess returns for holding long maturity bonds. Moreover, I also find evidence for the converse relationship that the shape of the yield curve… CONTINUE READING
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