Testing Interest Rate Models: What Does Futures and Options Data Tell Us?
32 Pages Posted: 28 Mar 2000
Date Written: December 1999
Bond and option prices contain information on the future distribution of the state variables related to interest rates at multiple horizons based on the maturity/expiration of the assets. This study uses the information contained in Eurodollar futures and futures options prices to make inferences regarding different specifications used to describe the evolution of the short-rate. A modification, to the commonly used short-rate specifications, that generates a humped term structure of volatility (upward sloping at short horizons) is found to significantly improve the ability of the specifications to generate option prices that match market options price.
JEL Classification: G12, G13, E43
Suggested Citation: Suggested Citation