Information in the Term Structure of Yield Curve Volatility
Northwestern University - Kellogg School of Management
Birkbeck, University of London
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, C51working papers series
Date posted: August 20, 2009 ; Last revised: October 25, 2013
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