Estimating the Term Structure of Volatility in Futures Yield - A Maximum Likelihood Approach

Ram Bhar and Carl Chiarella
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Ram Bhar: School of Banking and Finance, University of New South Wales

No 56, Working Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: The volatility structure of 90-day bill futures traded on the the Sydney Futures Exchange is analysed within the framework of the Heath-Jarrow-Morton model. The method involves characterisation of the transition probability density function for the forward rate process represented by the stochastic differential equation in the arbitrage-free economy. Maximisation of the likelihood function then results in the estimates of the parameters of the volatility function. The volatility function is also used in a simulation of the preference-free stochastic differential equation for bill prices.

Pages: 30 pages
Date: 1995-12-01
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Citations: View citations in EconPapers (1)

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