Download this Paper Open PDF in Browser

Information in the Term Structure of Yield Curve Volatility

53 Pages Posted: 20 Aug 2009 Last revised: 17 Jul 2015

Anna Cieslak

Duke University, Fuqua School of Business

Pavol Povala

Date Written: October 28, 2014

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.

Keywords: yield curve, stochastic volatility

JEL Classification: E43, C51

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: https://ssrn.com/abstract=1458006 or http://dx.doi.org/10.2139/ssrn.1458006

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/

No contact information is available for Pavol Povala

Paper statistics

Downloads
1,303
Rank
11,548
Abstract Views
11,006