Forecasting swap rate volatility with information from swaptions

Xiaoxi Liu and Jinming Xie

No 1068, BIS Working Papers from Bank for International Settlements

Abstract: We examine the predictability of the model-free implied volatility from swaptions on future realized volatility of the underlying swap rates. The model-free implied volatility demonstrates significant predictability on future realized volatility of swap rates along a wide cross-section of tenors. The predictive power of the model-free implied volatility is superior to the predictability of lagged realized volatility and GARCH-type conditional volatility. The superior predictive power of the model-free implied volatility also holds out of sample, in different market states and with longer forecasting horizons.

Keywords: swaption; model-free implied volatility; predictive regression; interest swap rate (search for similar items in EconPapers)
JEL-codes: C23 G11 G12 (search for similar items in EconPapers)
Date: 2023-01
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Journal Article: Forecasting swap rate volatility with information from swaptions (2023)
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