Volatility indices and implied uncertainty measures of European government bond futures
Jaroslav Baran and
Jan Voříšek
Additional contact information
Jan Voříšek: independent researcher
Working Papers from European Stability Mechanism
Abstract:
Implied volatility and other forward-looking measures of option-implied uncertainty help investors carefully evaluate market sentiment and expectations. We construct several measures of implied uncertainty in European government bond futures. In the first part, we create new volatility indices, which reflect market pricing of subsequently realised volatility of underlying bond futures. We express volatility indices in both price and basis points, the latter being more intuitive to interpret; we document their empirical properties, and discuss their possible applications. In the second part, we fit the volatility smile using the SABR model, and recover option-implied probability distribution of possible outcomes of bond futures prices. We analyse shapes of the implied distribution, track its quantiles over time, calculate its skewness and kurtosis, and infer probabilities of a given upside or downside move in the price of bond futures or in the yield of their underlying CTD bond. We illustrate these complementary measures throughout the note using Bund futures as an example, and show the results for Schatz, Bobl, OAT, and BTP futures in the annex. Such forward-looking measures help market participants quantify the degree of future market uncertainty and thoroughly assess what risks are priced in.
Keywords: bond futures; market expectations; options; probability density function; SABR; VIX; volatility index (search for similar items in EconPapers)
JEL-codes: C13 G13 G14 G17 (search for similar items in EconPapers)
Pages: 45
Date: 2020-05-13
New Economics Papers: this item is included in nep-fmk, nep-ore and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)
Downloads: (external link)
https://www.esm.europa.eu/sites/default/files/document/wp43.pdf
Our link check indicates that this URL is bad, the error code is: 404 Not Found
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:stm:wpaper:43
Access Statistics for this paper
More papers in Working Papers from European Stability Mechanism Contact information at EDIRC.
Bibliographic data for series maintained by Karol SISKIND ().