The Information Content of Treasury Bond Options Concerning Future Volatility and Price Jumps

Thomas Busch, Bent Jesper Christensen and Morten Orregaard Nielsen

No 273665, Queen's Economics Department Working Papers from Queen's University - Department of Economics

Abstract: We study the relation between realized and implied volatility in the bond market. Realized volatility is constructed from high-frequency (5-minute) returns on 30 year Treasury bond futures. Implied volatility is backed out from prices of associated bond options. Recent nonparametric sta- tistical techniques are used to separate realized volatility into its continuous sample path and jump components, thus enhancing forecasting performance. We generalize the heterogeneous autoregres- sive (HAR) model to include implied volatility as an additional regressor, and to the separate forecasting of the realized components. We also introduce a new vector HAR (VecHAR) model for the resulting simultaneous system, controlling for possible endogeneity of implied volatility in the forecasting equations. We show that implied volatility is a biased and inefficient forecast in the bond market. However, implied volatility does contain incremental information about future volatil- ity relative to both components of realized volatility, and even subsumes the information content of daily and weekly return based measures. Perhaps surprisingly, the jump component of realized bond return volatility is, to some extent, predictable, and bond options appear to be calibrated to incorporate information about future jumps in Treasury bond prices, and hence interest rates.

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 38
Date: 2006-02
References: Add references at CitEc
Citations:

Downloads: (external link)
https://ageconsearch.umn.edu/record/273665/files/qed_wp_1188.pdf (application/pdf)

Related works:
Working Paper: The Information Content Of Treasury Bond Options Concerning Future Volatility And Price Jumps (2006)
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: https://EconPapers.repec.org/RePEc:ags:quedwp:273665

DOI: 10.22004/ag.econ.273665

Access Statistics for this paper

More papers in Queen's Economics Department Working Papers from Queen's University - Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by AgEcon Search ().