Abstract

http://ssrn.com/abstract=1458006
 
 

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Information in the Term Structure of Yield Curve Volatility


Anna Cieslak


Northwestern University - Kellogg School of Management

Pavol Povala


Birkbeck, University of London

October 1, 2013


Abstract:     
We study volatility of US Treasuries. We propose a term structure model with stochastically correlated risks, which we estimate using realized volatilities and options. We identify time-varying volatilities and comovement of short-rate expectations and term premia. Volatility of short-rate expectations rises before recessions, predicts economic activity beyond the term spread, and covaries with measures of monetary policy uncertainty. Term premia become increasingly volatile in the aftermath of recessions and when economic policy uncertainty is high. Their correlation with expected short-rates fluctuates over time but is positive on average. Within an affine model, volatility has a small effect on the first moments of yields.

Number of Pages in PDF File: 51

Keywords: interest rate risk, realized yield covariance matrix, affine models, macro uncertainty, liquidity

JEL Classification: E43, C51

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Date posted: August 20, 2009 ; Last revised: August 26, 2014

Suggested Citation

Cieslak, Anna and Povala, Pavol, Information in the Term Structure of Yield Curve Volatility (October 1, 2013). Available at SSRN: http://ssrn.com/abstract=1458006 or http://dx.doi.org/10.2139/ssrn.1458006

Contact Information

Anna Cieslak (Contact Author)
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
Pavol Povala
Birkbeck, University of London ( email )
Malet Street
Bloomsbury
London, WC1E 7HX
United Kingdom
+44 (0) 20 7631 6486 (Phone)
HOME PAGE: http://www.ems.bbk.ac.uk/faculty/povala
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