EXPLAINING THE FORWARD INTEREST RATE TERM STRUCTURE

DOI10.1142/S0219024900000243MaRDI QIDQ4521260zbMATH OpenOpenAlexFDO

Authors A. Matacz, Jean-Philippe Bouchaud

Publication date 23 October 2001

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/cond-mat/9909396

zbMATH Keywords

forward rate curvevalue-at-risk like pricingvolatility

Mathematics Subject Classification ID

Microeconomic theory (price theory and economic markets) (91B24)

Abstract: We present compelling empirical evidence for a new interpretation of the Forward Rate Curve (FRC) term structure. We find that 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. This confirms the idea of an anticipated trend mechanism proposed earlier and provides a natural explanation for the observed shape of the FRC volatility. We find that the one-factor Gaussian Heath-Jarrow-Morton model calibrated to the empirical volatility function fails to adequately describe these features.

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Cites work

• Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation

Cited in

(4)

• Forward transition rates
• Phenomenology of the interest rate curve
• Funding shortages, expectations, and forward rate risk premium
• Revisiting elastic string models of forward interest rates

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