Treasury Yield Implied Volatility and Real Activity
87 Pages Posted: 26 Jul 2017
Date Written: July 21, 2017
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: Suggested Citation