Volatility patterns of short-term interest rate futures
42 Pages Posted: 30 Oct 2017 Last revised: 20 Jan 2021
Date Written: January 11, 2018
Abstract
A general question in finance is whether the volatility of futures contracts price follows any particular trend over the contract’s life. In this study, we contribute to the debate by analyzing the term structure of the volatility of short-term interest rates (STIR) futures prices to empirically assess whether a particular trend consistently prevails or if there is no trend at all. Using data on the Eurodollar, Euribor, and Short-Sterling futures contracts for the period between 2000 and 2018, we model the volatility of each individual contract considering time to expiration, financial markets conditions, and trading activity. Furthermore, our dataset arrangement allows us to investigate whether these trends change according to overall economic conditions. The results show that STIR futures behave differently than futures on other underlying assets and that, most of the time, STIR futures price volatility declines as the contract approaches expiration. However, the relation between volatility and time to maturity depends on market conditions and trading activity, and the relation appears to be non-linear.
Keywords: Short-term interest rates futures, maturity effect, volatility, term structure interest rates
JEL Classification: G12, G13
Suggested Citation: Suggested Citation