The incremental information in the yield curve about future interest rate risk

Bent Jesper Christensen, Mads Markvart Kjær and Bezirgen Veliyev

Journal of Banking & Finance, 2023, vol. 155, issue C

Abstract: Using high-frequency intraday futures prices to measure yield volatility at selected maturities, we find that daily yield curves carry incremental information about future interest rate risk at the long end, relative to that contained in the time series of historical volatilities. Some of the information in the yield curves is not captured by standard affine models. Our results point to the existence of an unspanned stochastic volatility factor. Both time series and yield curve based forecasts provide utility to a risk averse investor, relative to a random walk. Information from the two sources can be combined to enhance yield volatility forecasting performance.

Keywords: Term structure models; Volatility; Forecasting; Kalman filtering; Yield curve (search for similar items in EconPapers)
JEL-codes: C58 E43 G12 (search for similar items in EconPapers)
Date: 2023
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Working Paper: The incremental information in the yield curve about future interest rate risk (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:155:y:2023:i:c:s0378426623001711

DOI: 10.1016/j.jbankfin.2023.106973

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