Volatility patterns of short-term interest rate futures

42 Pages Posted: 30 Oct 2017 Last revised: 20 Jan 2021

See all articles by Pedro Gurrola-Perez

Pedro Gurrola-Perez

World Federation of Exchanges

Renata Herrerias

Instituto Tecnológico Autónomo de México (ITAM) - Department of Business Administration

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

Gurrola Perez, Pedro and Herrerias, Renata, Volatility patterns of short-term interest rate futures (January 11, 2018). Available at SSRN: https://ssrn.com/abstract=3060779 or http://dx.doi.org/10.2139/ssrn.3060779

Pedro Gurrola Perez

World Federation of Exchanges ( email )

125 Old Broad Street
London, EC2N 1AR
United Kingdom
EC2N 1AR (Fax)

HOME PAGE: http://www.world-exchanges.org

Renata Herrerias (Contact Author)

Instituto Tecnológico Autónomo de México (ITAM) - Department of Business Administration ( email )

Rio Hondo No. 1
Progreso Tizapan
Mexico, D.F. 01080
Mexico
+52(55)56284000 x. 6539 (Phone)

HOME PAGE: http://departamentodeadministracion.itam.mx/es

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