Andrew Matacz (Science & Finance, Capital Fund Management) Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management, CEA Saclay;)
Abstract
In this paper we study empirically the Forward Rate Curve (FRC) of 5 different currencies. We confirm and extend the findings of our previous investigation of the U.S. Forward Rate Curve. In particular, the average FRC follows a square-root law, with a prefactor related to the spot volatility, suggesting a Value-at-Risk like pricing. We find a striking correlation between the instantaneous FRC and the past spot trend over a certain time horizon, in agreement with the idea of an extrapolated trend effect. We present a model which can be adequately calibrated to account for these effects.
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Length: Date of creation: Jul 1999 Date of revision: Publication status: Forthcoming in International Journal of Theoretical and Applied Finance Handle: RePEc:sfi:sfiwpa:500047
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