Abstract

http://ssrn.com/abstract=1458006
 


 



Information in the Term Structure of Yield Curve Volatility


Anna Cieslak


Duke University, Fuqua School of Business

Pavol Povala


Birkbeck, University of London

October 28, 2014

Journal of Finance, Forthcoming

Abstract:     
We decompose conditional volatilities of US Treasury yields into components due to short-rate expectations and term premia. To this end, we propose a novel no-arbitrage model which we estimate with extensive second-moment data. Short-rate expectations become more volatile than premia before recessions and during asset market distress. The correlation between shocks to premia and expectations is close to zero on average and varies with stance of monetary policy. While Treasuries are nearly unexposed to variance shocks, investors pay a large premium for hedging variance risk with derivatives. We illustrate the distinct dynamics of those yield volatility components during and after the financial crisis.

Number of Pages in PDF File: 53

Keywords: yield curve, stochastic volatility

JEL Classification: E43, C51


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Date posted: August 20, 2009 ; Last revised: July 17, 2015

Suggested Citation

Cieslak, Anna and Povala, Pavol, Information in the Term Structure of Yield Curve Volatility (October 28, 2014). Journal of Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1458006 or http://dx.doi.org/10.2139/ssrn.1458006

Contact Information

Anna Cieslak (Contact Author)
Duke University, Fuqua School of Business ( email )
100 Fuqua Drive
Durham, NC 27708-0204
United States
919 660 7879 (Phone)
HOME PAGE: http://https://sites.google.com/site/ancieslak/
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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