IDEAS home Printed from
   My bibliography  Save this paper

Volatility and the Term Structure: Evidence from Interest Rate Derivatives


  • Alessandro Beber; Fabio Fornari.


Recent evidence on bond markets suggests that there are risk factors underlying changes in interest rate derivatives prices that are independent of those underlying shifts in the yield curve. The presence of unspanned factors seems puzzling because derivatives are based on the underlying interest rates. This paper shows that the factors extracted from interest rate derivatives prices are essential in forecasting yields out-of-sample, despite being poorly related to movements in the yield curve. More specifically, we bring in information about the term structure of implied volatility from derivatives data and we use it to model the yield curve as a six-dimensional parameter dynamic system. The forecasts generated by our model appear more accurate than various standard benchmark forecasts. Moreover our investigation proves to be interesting with respect to the extant literature, because of a higher data frequency and a longer sample period. As a by-product of our analysis, we obtain forecasts of volatility that can be useful for derivatives pricing and hedging purposes. Finally, our results are especially important in light of the general failure of affine term structure models for the purpose of forecasting

Suggested Citation

  • Alessandro Beber; Fabio Fornari., 2004. "Volatility and the Term Structure: Evidence from Interest Rate Derivatives," Computing in Economics and Finance 2004 313, Society for Computational Economics.
  • Handle: RePEc:sce:scecf4:313

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item


    term structure; volatility.;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sce:scecf4:313. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.