Interest rate futures: estimation of volatility parameters in an arbitrage-free framework

Ramaprasad Bhar and Carl Chiarella

Applied Mathematical Finance, 1997, vol. 4, issue 4, 181-199

Abstract: Hedging interest rate exposures using interest rate futures contracts requires some knowledge of the volatility function of the interest rates. Use of historical data as well as interest rate options like caps and swaptions to estimate this volatility function have been proposed in the literature. In this paper the interest rate futures price is modelled within an arbitrage-free framework for a volatility function which includes a stochastic variable, the instantaneous spot interest rate. The resulting system is expressed in a state space form which is solved using an extended Kalman filter. The residual diagnostics indicate suitability of the model and the bootstrap resampling technique is used to obtain small sample properties of the parameters of the volatility function.

Keywords: Interest Rate Futures; Heath-jarrow-morton Model; Arbitrage-free; Kalman Filter; Bootstrap, (search for similar items in EconPapers)
Date: 1997
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Citations: View citations in EconPapers (7)

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Working Paper: Interest Rate Futures: Estimation of Volatility Parameters in an Arbitrage-Free Framework (1995)
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DOI: 10.1080/135048697334737

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