Do Bonds Span Volatility Risk In The U S Treasury Market

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Do Bonds Span Volatility Risk In The U S Treasury Market

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Author : Torben Gustav Andersen
language : en
Publisher:
Release Date : 2007

Do Bonds Span Volatility Risk In The U S Treasury Market written by Torben Gustav Andersen and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2007 with Government securities categories.

We investigate whether bonds span the volatility risk in the U.S. Treasury market, as predicted by most 'affine' term structure models. To this end, we construct powerful and model-free empirical measures of the quadratic yield variation for a cross-section of fixed-maturity zero-coupon bonds ("realized yield volatility") through the use of high-frequency data. We find that the yield curve fails to span yield volatility, as the systematic volatility factors are largely unrelated to the cross-section of yields. We conclude that a broad class of affine diffusive, Gaussian-quadratic and affine jump-diffusive models is incapable of accommodating the observed yield volatility dynamics. An important implication is that the bond markets per se are incomplete and yield volatility risk cannot be hedged by taking positions solely in the Treasury bond market. We also advocate using the empirical realized yield volatility measures more broadly as a basis for specification testing and (parametric) model selection within the term structure literature.

Do Bonds Span Volatility Risk In The U S Treasury Market A Specification Test For Affine Term Structure Models

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Author : Torben G. Andersen
language : en
Publisher:
Release Date : 2010

Do Bonds Span Volatility Risk In The U S Treasury Market A Specification Test For Affine Term Structure Models written by Torben G. Andersen and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2010 with categories.

We investigate whether bonds span the volatility risk in the U.S. Treasury market, as predicted by most 'affine' term structure models. To this end, we construct powerful and model-free empirical measures of the quadratic yield variation for a cross-section of fixed-maturity zero-coupon bonds (quot;realized yield volatilityquot;) through the use of high-frequency data. We find that the yield curve fails to span yield volatility, as the systematic volatility factors are largely unrelated to the cross-section of yields. We conclude that a broad class of affine diffusive, Gaussian-quadratic and affine jump-diffusive models is incapable of accommodating the observed yield volatility dynamics. An important implication is that the bond markets per se are incomplete and yield volatility risk cannot be hedged by taking positions solely in the Treasury bond market. We also advocate using the empirical realized yield volatility measures more broadly as a basis for specification testing and (parametric) model selection within the term structure literature.

Do Bonds Span Volatility Risks In The U S Treasury Market

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Author : Torben Gustav Andersen
language : en
Publisher:
Release Date : 2007

Do Bonds Span Volatility Risks In The U S Treasury Market written by Torben Gustav Andersen and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2007 with Economics categories.

We investigate whether bonds span the volatility risk in the U.S. Treasury market, as predicted by most 'affine' term structure models. To this end, we construct powerful and model-free empirical measures of the quadratic yield variation for a cross-section of fixed-maturity zero-coupon bonds ("realized yield volatility") through the use of high-frequency data. We find that the yield curve fails to span yield volatility, as the systematic volatility factors are largely unrelated to the cross-section of yields. We conclude that a broad class of affine diffusive, Gaussian-quadratic and affine jump-diffusive models is incapable of accommodating the observed yield volatility dynamics. An important implication is that the bond markets per se are incomplete and yield volatility risk cannot be hedged by taking positions solely in the Treasury bond market. We also advocate using the empirical realized yield volatility measures more broadly as a basis for specification testing and (parametric) model selection within the term structure literature.

Do Bonds Span Volatility Risk In The U S Treasury Market A Specification Test For Fine Term Structure Models

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Author : Torben G. Andersen
language : en
Publisher:
Release Date : 2007

Do Bonds Span Volatility Risk In The U S Treasury Market A Specification Test For Fine Term Structure Models written by Torben G. Andersen and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2007 with categories.

Do Bonds Span The Fixed Income Markets Theory And Evidence For Unspanned Stochastic Volatility

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Author : Pierre Collin-Dufresne
language : en
Publisher:
Release Date : 2011

Do Bonds Span The Fixed Income Markets Theory And Evidence For Unspanned Stochastic Volatility written by Pierre Collin-Dufresne and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2011 with categories.

Most models of the term structure are restrictive in that they assume the bond market forms a complete market. That is, they assume all sources of risk affecting fixed income derivatives can be completely hedged by a portfolio consisting solely of bonds. Below, we present empirical evidence which suggests this prediction fails in practice. In particular, we find that changes in swap rates have very limited explanatory power for returns on at-the-money straddles - portfolios mainly exposed to volatility risk. We term this empirical feature 'unspanned' stochastic volatility (USV). We demonstrate that bivariate Markov models (e.g., Fong and Vasicek (1991), Longstaff and Schwartz (1992)) cannot exhibit USV. Then, we determine necessary (and apparently sufficient) parameter restrictions for trivariate Markov affine systems to exhibit USV. Finally, USV is shown to occur naturally within the Heath-Jarrow-Morton framework.

Spanned Stochastic Volatility In Bond Markets

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Author : Don H. Kim
language : en
Publisher:
Release Date : 2007

Spanned Stochastic Volatility In Bond Markets written by Don H. Kim and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2007 with 1996-2008 categories.

This paper reexamines the issue of unspanned stochastic volatility (USV) in bond markets and the puzzle of poor relative pricing between bonds and bond options. I make a distinction between the "weak USV" and the "strong USV" scenarios, and analyze the evidence for each of them. I argue that the poor bonds/options relative pricing in the extant literature is not necessarily evidence for the strong USV scenario, and show that a maximally flexible 2-factor quadratic-Gaussian model (a non-USV model) estimated without bond options data can capture much of the movement in bond option prices. Dropping the positive-definiteness requirement for nominal interest rates and adopting "regularized" estimations turn out to be important for obtaining sensible results.

Handbook Of Financial Time Series

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Author : Torben Gustav Andersen
language : en
Publisher: Springer Science & Business Media
Release Date : 2009-04-21

Handbook Of Financial Time Series written by Torben Gustav Andersen and has been published by Springer Science & Business Media this book supported file pdf, txt, epub, kindle and other format this book has been release on 2009-04-21 with Business & Economics categories.

The Handbook of Financial Time Series gives an up-to-date overview of the field and covers all relevant topics both from a statistical and an econometrical point of view. There are many fine contributions, and a preamble by Nobel Prize winner Robert F. Engle.

Yield Curve Modeling And Forecasting

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Author : Francis X. Diebold
language : en
Publisher: Princeton University Press
Release Date : 2013-01-15

Yield Curve Modeling And Forecasting written by Francis X. Diebold and has been published by Princeton University Press this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013-01-15 with Business & Economics categories.

Understanding the dynamic evolution of the yield curve is critical to many financial tasks, including pricing financial assets and their derivatives, managing financial risk, allocating portfolios, structuring fiscal debt, conducting monetary policy, and valuing capital goods. Unfortunately, most yield curve models tend to be theoretically rigorous but empirically disappointing, or empirically successful but theoretically lacking. In this book, Francis Diebold and Glenn Rudebusch propose two extensions of the classic yield curve model of Nelson and Siegel that are both theoretically rigorous and empirically successful. The first extension is the dynamic Nelson-Siegel model (DNS), while the second takes this dynamic version and makes it arbitrage-free (AFNS). Diebold and Rudebusch show how these two models are just slightly different implementations of a single unified approach to dynamic yield curve modeling and forecasting. They emphasize both descriptive and efficient-markets aspects, they pay special attention to the links between the yield curve and macroeconomic fundamentals, and they show why DNS and AFNS are likely to remain of lasting appeal even as alternative arbitrage-free models are developed. Based on the Econometric and Tinbergen Institutes Lectures, Yield Curve Modeling and Forecasting contains essential tools with enhanced utility for academics, central banks, governments, and industry.

Complex Systems In Finance And Econometrics

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Author : Robert A. Meyers
language : en
Publisher: Springer Science & Business Media
Release Date : 2010-11-03

Complex Systems In Finance And Econometrics written by Robert A. Meyers and has been published by Springer Science & Business Media this book supported file pdf, txt, epub, kindle and other format this book has been release on 2010-11-03 with Business & Economics categories.

Finance, Econometrics and System Dynamics presents an overview of the concepts and tools for analyzing complex systems in a wide range of fields. The text integrates complexity with deterministic equations and concepts from real world examples, and appeals to a broad audience.

Issues In Finance Business And Economics Research 2011 Edition

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Author :
language : en
Publisher: ScholarlyEditions
Release Date : 2012-01-09

Issues In Finance Business And Economics Research 2011 Edition written by and has been published by ScholarlyEditions this book supported file pdf, txt, epub, kindle and other format this book has been release on 2012-01-09 with Business & Economics categories.

Issues in Finance, Business, and Economics Research: 2011 Edition is a ScholarlyEditions™ eBook that delivers timely, authoritative, and comprehensive information about Finance, Business, and Economics Research. The editors have built Issues in Finance, Business, and Economics Research: 2011 Edition on the vast information databases of ScholarlyNews.™ You can expect the information about Finance, Business, and Economics Research in this eBook to be deeper than what you can access anywhere else, as well as consistently reliable, authoritative, informed, and relevant. The content of Issues in Finance, Business, and Economics Research: 2011 Edition has been produced by the world’s leading scientists, engineers, analysts, research institutions, and companies. All of the content is from peer-reviewed sources, and all of it is written, assembled, and edited by the editors at ScholarlyEditions™ and available exclusively from us. You now have a source you can cite with authority, confidence, and credibility. More information is available at http://www.ScholarlyEditions.com/.