An Empirical Analysis of the Common Factors Governing Us Dollar-Libor Implied Volatility Movements

22 Pages Posted: 21 Jan 2000

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Abstract

Common factors governing movements in the US $ yield curve have been examined extensively both in the academic and practitioner literature. The issue of which factors drive volatility in the US $ LIBOR market has not been addressed adequately in the literature, presumably because of lack of easy access to high-quality volatility data in these markets. This paper seeks to fill this void by attempting to identify various factors that drive basis-point volatility in the US $-LIBOR caplet and swaption markets. We provide intuitive interpretation for four of the most important volatility factors that explain between 75% and 98% of the in-sample variance, and between 52% and 89% of the out-of-sample variance observed in the volatility matrix.

Suggested Citation

Wadhwa, Pavan G., An Empirical Analysis of the Common Factors Governing Us Dollar-Libor Implied Volatility Movements. Available at SSRN: https://ssrn.com/abstract=205768 or http://dx.doi.org/10.2139/ssrn.205768

Pavan G. Wadhwa (Contact Author)

J.P. Morgan Chase & Co. ( email )

60 Wall St.
New York, NY 10260
United States
(212) 648-8841 (Phone)

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