Treasury Yield Implied Volatility and Real Activity

87 Pages Posted: 26 Jul 2017

See all articles by Martijn Cremers

Martijn Cremers

University of Notre Dame

Matthias Fleckenstein

University of Delaware

Priyank Gandhi

Rutgers Business School, Newark and New Brunswick

Date Written: July 21, 2017

Abstract

We show that the level of at-the-money implied volatility from the Treasury derivatives market (Treasury ‘yield implied volatility’) predicts both the level and volatility of macroeconomic activity such as the growth rates of GDP, industrial production, consumption, and employment, as well as of financial variables such as the level of interest rates and the slope of the term structure, the Libor-OIS spread, and bank credit. This predictability is robust to controlling for the short-term interest rate and the term spread, stock returns and stock market implied volatility. Treasury yield implied volatility thus constitutes a useful forward-looking state variable to characterize risks and opportunities in the macroeconomy.

Keywords: Treasury Futures, Treasury Futures Options, Implied Volatility, Interest Rate, Business Cycles, Real Activity, Macroeconomic Activity, Macroeconomic Uncertainty, Forecasting, Libor-OIS Spread, Bank Credit

JEL Classification: E31, E37, F31, G12, G13

Suggested Citation

Cremers, K. J. Martijn and Fleckenstein, Matthias and Gandhi, Priyank, Treasury Yield Implied Volatility and Real Activity (July 21, 2017). Available at SSRN: https://ssrn.com/abstract=3006473 or http://dx.doi.org/10.2139/ssrn.3006473

K. J. Martijn Cremers (Contact Author)

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Matthias Fleckenstein

University of Delaware ( email )

419 Purnell Hall
Newark, DE 19716
United States
3028314936 (Phone)

HOME PAGE: http://www.mfleckenstein.com

Priyank Gandhi

Rutgers Business School, Newark and New Brunswick ( email )

111 Washington Avenue
Newark, NJ 07102
United States

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