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The rise and fall of US dollar interest rate volatility: evidence from swaptions

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  • Fabio Fornari

Abstract

Interest rate volatility, as implied by swaptions prices, rose in all major economic areas between 2001 and early 2004. The increase was particularly sharp for US rates and was more sizeable for short-term rates and swaptions with short expiration. Since the spring of 2004, US dollar volatilities have declined to the values recorded for euro rates and their term structure has flattened. The rise and fall of US dollar implied volatility reflected changes both in expectations of realised volatility and in the compensation for volatility risk.

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Bibliographic Info

Article provided by Bank for International Settlements in its journal BIS Quarterly Review.

Volume (Year): (2005)
Issue (Month): (September)
Pages:

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Handle: RePEc:bis:bisqtr:0509g

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  1. Fabio Fornari, 2004. "Macroeconomic announcements and implied volatilities in swaption markets," BIS Quarterly Review, Bank for International Settlements, September.
  2. Nelson, Daniel B. & Foster, Dean P., 1995. "Filtering and forecasting with misspecified ARCH models II : Making the right forecast with the wrong model," Journal of Econometrics, Elsevier, vol. 67(2), pages 303-335, June.
  3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  4. Ederington, Louis H & Lee, Jae Ha, 1993. " How Markets Process Information: News Releases and Volatility," Journal of Finance, American Finance Association, vol. 48(4), pages 1161-91, September.
  5. Robert F. Engle & Victor K. Ng, 1991. "Measuring and Testing the Impact of News on Volatility," NBER Working Papers 3681, National Bureau of Economic Research, Inc.
  6. Joshua Rosenberg & Robert F. Engle, 2000. "Empirical Pricing Kernels," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-014, New York University, Leonard N. Stern School of Business-.
  7. Gurdip Bakshi & Nikunj Kapadia, 2003. "Delta-Hedged Gains and the Negative Market Volatility Risk Premium," Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 527-566.
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Cited by:
  1. Mandler, Martin, 2007. "The Taylor rule and interest rate uncertainty in the U.S. 1955-2006," MPRA Paper 2340, University Library of Munich, Germany.
  2. Blaise Gadanecz & Richhild Moessner & Christian Upper, 2007. "Economic derivatives," BIS Quarterly Review, Bank for International Settlements, March.
  3. Balogh, Peter & Kovacs, Sandor & Chaiboonsri, Chukiat & Chaitip, Prasert, 2009. "Forecasting with X-12-ARIMA: International tourist arrivals to India and Thailand," APSTRACT: Applied Studies in Agribusiness and Commerce, AGRIMBA, vol. 3.
  4. Nikola Tarashev & Kostas Tsatsaronis, 2006. "Risk premia across asset markets: information from option prices," BIS Quarterly Review, Bank for International Settlements, March.
  5. Prasert Chaitip & Chukiat Chaiboonsri, 2009. "Down Trend Forecasting Method with ARFIMA: International Tourist Arrivals to Thailand," Annals of the University of Petrosani, Economics, University of Petrosani, Romania, vol. 9(1), pages 143-150.
  6. Prasert Chaitip & Chukiat Chaiboonsri & N. Rangaswamy & Siriporn Mcdowall, 2009. "Forecasting with X-12-Arima: International Tourist Arrivals to India," Annals of the University of Petrosani, Economics, University of Petrosani, Romania, vol. 9(1), pages 107-128.
  7. Prasert Chaitip & Chukiat Chaiboonsri, 2009. "Forecasting with X-12-ARIMA and ARFIMA: International Tourist Arrivals to India," Annals of the University of Petrosani, Economics, University of Petrosani, Romania, vol. 9(3), pages 147-162.

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