Forecasting swap rate volatility with information from swaptions

We examine the predictability of the model-free implied volatility from swaptions on future realized volatility of the underlying swap rates. The model-free implied volatility demonstrates significant predictability on future realized volatility of swap rates along a wide cross-section of tenors. The predictive power of the model-free implied volatility is superior to the predictability of lagged realized volatility and GARCH-type conditional volatility. The superior predictive power of the model-free implied volatility also holds out of sample, in different market states and with longer forecasting horizons.