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

Bent Jesper Christensen; Mads Markvart Kjær; Bezirgen Veliyev

doi:10.1016/j.jbankfin.2023.106973

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

Bent Jesper Christensen^*, Mads Markvart Kjær, Bezirgen Veliyev

^*Corresponding author for this work

Department of Economics and Business Economics

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaper › Journal article › Research › peer-review

1 Citation (Scopus)

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.

Original language	English
Article number	106973
Journal	Journal of Banking and Finance
Volume	155
ISSN	0378-4266
DOIs	https://doi.org/10.1016/j.jbankfin.2023.106973
Publication status	Published - Oct 2023

Keywords

Forecasting
Kalman filtering
Term structure models
Volatility
Yield curve

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10.1016/j.jbankfin.2023.106973Licence: CC BY

1-s2.0-S0378426623001711-mainFinal published version, 2.05 MBLicence: CC BY

Cite this

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title = "The incremental information in the yield curve about future interest rate risk",

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 = "Forecasting, Kalman filtering, Term structure models, Volatility, Yield curve",

author = "Christensen, {Bent Jesper} and Kj{\ae}r, {Mads Markvart} and Bezirgen Veliyev",

note = "Publisher Copyright: {\textcopyright} 2023 The Authors",

year = "2023",

month = oct,

doi = "10.1016/j.jbankfin.2023.106973",

language = "English",

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journal = "Journal of Banking and Finance",

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T1 - The incremental information in the yield curve about future interest rate risk

AU - Christensen, Bent Jesper

AU - Kjær, Mads Markvart

AU - Veliyev, Bezirgen

PY - 2023/10

Y1 - 2023/10

N2 - 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.

AB - 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.

KW - Forecasting

KW - Kalman filtering

KW - Term structure models

KW - Volatility

KW - Yield curve

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U2 - 10.1016/j.jbankfin.2023.106973

DO - 10.1016/j.jbankfin.2023.106973

M3 - Journal article

AN - SCOPUS:85168476664

SN - 0378-4266

VL - 155

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

M1 - 106973

ER -

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

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Keywords

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