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An empirical investigation of the forward interest rate term structure

Author

Listed:
  • 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.

Suggested Citation

  • Andrew Matacz & Jean-Philippe Bouchaud, 1999. "An empirical investigation of the forward interest rate term structure," Science & Finance (CFM) working paper archive 500047, Science & Finance, Capital Fund Management.
    • Handle: RePEc:sfi:sfiwpa:500047
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    References listed on IDEAS

    as
    1. Carl Chiarella & Oh-Kang Kwon, 1999. "Classes of Interest Rate Models Under the HJM Framework," Research Paper Series 13, Quantitative Finance Research Centre, University of Technology, Sydney.
    2. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Andrew Matacz & Jean-Philippe Bouchaud, 1999. "Explaining the forward interest rate term structure," Science & Finance (CFM) working paper archive 500046, Science & Finance, Capital Fund Management.
    2. Marc Potters & Jean-Philippe Bouchaud & Dragan Sestovic, 2000. "Hedged Monte-Carlo: low variance derivative pricing with objective probabilities," Science & Finance (CFM) working paper archive 500031, Science & Finance, Capital Fund Management.
    3. Belal Baaquie & Jean-Philippe Bouchaud, 2004. ""Stiff" Field Theory of Interest Rates and Psychological Future Time," Science & Finance (CFM) working paper archive 500064, Science & Finance, Capital Fund Management.
    4. Belal Baaquie & Jean-Philippe Bouchaud, 2004. ""Stiff" Field Theory of Interest Rates and Psychological Future Time," Papers cond-mat/0403713, arXiv.org.
    5. Andrew Matacz & Jean-Philippe Bouchaud, 2000. "Explaining The Forward Interest Rate Term Structure," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 3(03), pages 381-389.

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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