Explaining the forward interest rate term structure

Andrew Matacz and Jean-Philippe Bouchaud
Additional contact information
Andrew Matacz: Science & Finance, Capital Fund Management
Jean-Philippe Bouchaud: Science & Finance, Capital Fund Management

No 500046, Science & Finance (CFM) working paper archive from Science & Finance, Capital Fund Management

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.

JEL-codes: G10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-mon
Date: 1999-09
View list of references

Forthcoming in Risk Magazine

Downloads: (external link)
http://www.cfm.fr/papers/usfrc.pdf (application/pdf)

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: http://EconPapers.repec.org/RePEc:sfi:sfiwpa:500046

Access Statistics for this paper

More papers in Science & Finance (CFM) working paper archive from Science & Finance, Capital Fund Management
Address: 6 boulevard Haussmann, 75009 Paris, FRANCE
Contact information at EDIRC.
Series data maintained by Marc Potters ().