Interest Rate Volatility: A Consol Rate-Based Measure

40 Pages Posted: 12 Feb 2013

See all articles by Vincent Brousseau

Vincent Brousseau

European Central Bank, Directorate General Economics

Alain Durré

European Central Bank (ECB) - Directorate General Economics; IéSEG - Université Catholique de Lille; National Center for Scientific Research - LEM

Date Written: January 7, 2013

Abstract

In this paper we propose a new methodology to estimate the volatility of interest rates in the euro area money market. In particular, our approach aims at avoiding the limitations of currently available measures, i.e. the dependency on arbitrary choices in terms of maturity and frequencies and/or of factors other than pure interest rates, e.g. credit risk or liquidity risk. The measure is constructed as the implied instantaneous volatility of a consol bond that would be priced on the EONIA swap curve over the sample period from 4 January 1999 to 20 November 2012. We show that this measure tracks well the historical volatility, in the sense that dividing the consol excess returns by this volatility removes nearly entirely excess of kurtosis and volatility clustering, bringing them close to an ordinary Gaussian white noise.

Keywords: consol rate, historical volatility, overnight money market, interbank offered interest rates

JEL Classification: E43, E58, C22, C32

Suggested Citation

Brousseau, Vincent and Durre, Alain C. J., Interest Rate Volatility: A Consol Rate-Based Measure (January 7, 2013). ECB Working Paper No. 1505. Available at SSRN: https://ssrn.com/abstract=2197250

Vincent Brousseau (Contact Author)

European Central Bank, Directorate General Economics ( email )

Kaiserstrasse 29
Frankfurt am Main, 60311
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Alain C. J. Durre

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

IéSEG - Université Catholique de Lille ( email )

3, rue de la Digue
F-59800 Lille
France

National Center for Scientific Research - LEM ( email )

106-112 Boulevard de l'Hopital
F- 75647 Paris Cedex 13
France

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