Are Interest Rate Derivatives Spanned by the Term Structure of Interest Rates?

Massoud Heidari and Liuren Wu
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Massoud Heidari: Caspian Capital

Finance from University Library of Munich, Germany

Abstract: We investigate whether the same finite dimensional dynamic system spans both interest rates (the yield curve) and interest rate options (the implied volatility surface). We find that the options market exhibits factors independent of the underlying yield curve. While three common factors are adequate to capture the systematic movement of the yield curve, we need three additional factors to capture the movement of the implied volatility surface.

Keywords: Factors; principal component; LIBOR; swaps; swaptions; yield curve; implied volatility surface. (search for similar items in EconPapers)
JEL-codes: E43 G12 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2002-08-30
Note: Type of Document - pdf; prepared on MikTex; to print on postscript; pages: 48 ; figures: included. produced via dvipdfm
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0207013

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