 Option-implied bond spread riskGergely Hudecz, Edmund Moshammer and Marco Onofri Working Papers from European Stability Mechanism Abstract: Government bond yield futures and related option contracts contain information on the asymmetry of interest rate risks. We construct probability distributions of market- implied bond yield expectations up to 90 calendar days ahead between January 2018 and December 2023. We derive daily distributions for German, French, and Italian bond yields as well as bivariate distributions using a copula to analyse tail risks in bond spread movement. We confirm options to be useful in predicting bond yields and spreads when benchmarking against backward-looking models. Furthermore, we find tail spread measures to be correlated with stock market volatility, inflation expectations, monetary policy surprises, and global economic conditions. In the period under scrutiny, the correlation between these indicators and the Italian spread tail is stronger than the one with the French measure. While changes in global economic conditions and central bank asset purchases strongly correlate with the Italian spread tail, these are less relevant for the French one. Keywords: Financial market; sovereign bond yield; risk premium; euro area; option contract; risk-neutral distribution; probability density function; copula model (search for similar items in EconPapers) Published Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:stm:wpaper:66 Access Statistics for this paper More papers in Working Papers from European Stability Mechanism Contact information at EDIRC. |
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