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Interest Rate Volatility and Business Cycle Expectations[a]

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  • María-Isabel Martínez-Serna
  • Eliseo Navarro

Abstract

type="main" xml:lang="en"> One explanation for the usefulness of financial variables as tools for economic forecasting is that they embody individual and firm expectations of future economic conditions. In this paper, we analyse whether interest rate volatility contains information on agent expectations which are directly measured by confidence indicators. For the sake of robustness, we use several different expectation indicators for the two countries we analyse, the US and Germany. We propose using a forward-looking measure of volatility: the implied volatility of one year cap options. We find that implied volatility adds explanatory power to the yield spread and to changes in the short rate, which are typical predictors of the business cycle, and outperforms realized volatility.

Suggested Citation

  • María-Isabel Martínez-Serna & Eliseo Navarro, 2015. "Interest Rate Volatility and Business Cycle Expectations[a]," International Finance, Wiley Blackwell, vol. 18(1), pages 69-92, March.
    • Handle: RePEc:bla:intfin:v:18:y:2015:i:1:p:69-92
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    Cited by:

    1. Oluwasegun B. Adekoya & Johnson A. Oliyide, 2021. "Business confidence as a strong tracker of future growth: is it driven by economic policy uncertainty and oil price shocks in the OECD countries?," Future Business Journal, Springer, vol. 7(1), pages 1-13, December.
    2. Gabriel Caldas Montes & André Almeida, 2017. "Corruption and business confidence: a panel data analysis," Economics Bulletin, AccessEcon, vol. 37(4), pages 2692-2702.
    3. André Filipe Guedes Almeida & Gabriel Caldas Montes, 2020. "Effects of crime and violence on business confidence: evidence from Rio de Janeiro," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 47(7), pages 1669-1688, May.

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