Inferring Volatility from the Yield Curve

Vincent Brousseau¹, Alain Durré²

¹https://www.researchgate.net/profile/Vincent_Brousseau2.
²IÉSEG-School of Management (Lille Catholic University) and LEM-CNRS, Lille, France.

DOI: 10.4236/jmf.2015.53026                

Abstract

In this paper, we assess how to recover the volatility of interest rates in the euro area money market, on the sole basis of the zero-coupon yield curve. Our primary result is that there exists an empirical regularity (linking rates and volatility) that takes a relatively simple mathematical form. We also show that the existence of such regularity cannot be explained by a reasoning based on the hypothesis of absence of opportunities of arbitrage since a continuous-time arbitrage-free model may produce instances of curves that are consistent with a continuum of level of volatilities. We exhibit an example for this.

Keywords

Yield Curve, Volatility, Consol Volatility, Affine Model

Conflicts of Interest

The authors declare no conflicts of interest.

References

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