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Uncertainty about interest rates and the real economy

Author

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  • Qadan, Mahmoud
  • Shuval, Kerem
  • David, Or

Abstract

This study utilizes data from the US options market and constructs a VIX-style measure of forward-looking volatility about Treasury yields to capture uncertainty about interest rates. Using the structural VAR model, we show that increases in uncertainty about interest rates predict the slowing of future activity. Greater expected volatility in interest rates predicts declines in industrial production, retail trade, consumer and producer prices, and increased unemployment. These results also remain robust when decomposing the VIX-style measure into two parts: volatility calculated using out-of-the-money put options and volatility calculated from out-of-the-money call options. Finally, uncertainty about 7 to 10-year Treasuries is more informative about the future of the economy than uncertainty about 20-year yields.

Suggested Citation

  • Qadan, Mahmoud & Shuval, Kerem & David, Or, 2023. "Uncertainty about interest rates and the real economy," The North American Journal of Economics and Finance, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:ecofin:v:68:y:2023:i:c:s1062940823001018
    DOI: 10.1016/j.najef.2023.101978
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Yasmeen Bayaa & Mahmoud Qadan, 2024. "Interest rate uncertainty and the shape of the yield curve of U.S. treasury bonds," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 14(4), pages 981-1003, December.
    2. António Portugal Duarte & Fátima Sol Murta & Nuno Baetas Silva, 2025. "Will the euro replace the U.S. dollar as the leading international currency? A volatility analysis," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 15(1), pages 1-27, March.
    3. Bayaa, Yasmeen & Qadan, Mahmoud, 2024. "The shape of the Treasury yield curve and commodity prices," International Review of Financial Analysis, Elsevier, vol. 94(C).
    4. Mahmoud Qadan & Gil Cohen, 2024. "Uncertainty about interest rates and crude oil prices," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 10(1), pages 1-14, December.
    5. Melas Konstantinos D. & Michail Nektarios A. & Louca Kyriaki G., 2025. "Trade Uncertainty, Economic Policy Uncertainty and Shipping Costs," German Economic Review, De Gruyter, vol. 26(1), pages 15-33.

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    More about this item

    Keywords

    Treasury futures and options; Implied volatility; VIX; Forecasting;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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