Inferring Future Volatility from the Information in Implied Volatility in Eurodollar Options: A New Approach

REVIEW OF FINANCIAL STUDIES, Vol. 10 No. 2

Posted: 27 Feb 1997

See all articles by Kaushik I. Amin

Kaushik I. Amin

Lehman Brothers

Victor K. Ng

International Monetary Fund (IMF) - Research Department; National Bureau of Economic Research (NBER)

Abstract

We study the information content of implied volatility from several volatility specifications of the Heath-Jarrow-Morton (1992) (HJM) model relative to popular historical volatility models in the Eurodollar options market. The implied volatility from the HJM models explains much of the variation of realized interest rate volatility over both daily and monthly horizons. The implied volatility dominates the GARCH terms, the Glosten, Jagannathan and Runkle (1993) type asymmetric volatility terms, and the interest rate level. However, it cannot explain that the impact of interest rate shocks on the volatility is lower when interest rates are low than when they are high.

JEL Classification: G13

Suggested Citation

Amin, Kaushik I. and Ng, Victor K., Inferring Future Volatility from the Information in Implied Volatility in Eurodollar Options: A New Approach. REVIEW OF FINANCIAL STUDIES, Vol. 10 No. 2, Available at SSRN: https://ssrn.com/abstract=8149

Kaushik I. Amin

Lehman Brothers ( email )

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Victor K. Ng (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

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National Bureau of Economic Research (NBER)

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