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Inferring Future Volatility from the Information in Implied Volatility in Eurodollar Options: A New Approach

Kaushik I. Amin1; Victor Ng2

1 Lehman College · 2 Goldman Sachs (United States)

Review of Financial Studies 1997

We study the information content of implied volatility from several volatility specifications of the Heath–Jarrow–Morton (1992) (HJM) models relative to popular historical volatility models in the Eurodollar options market. The implied volatility from the HJM models explains much of the variation of realized interest rate volatility over both daily and monthly horizons. The implied volatility dominates the GARCH terms, the Glosten et al. (1993) type asymmetric volatility terms, and the interest rate level. However, it cannot explain that the impact of interest rate shocks on the volatility is lower when interest rates are low than when they are high.

DOI
10.1093/rfs/10.2.333
Volume
10 (2)
Pages
333-367
Language
en
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