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

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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. At the short end, time series based forecasts outperform yield curve based forecasts. Both provide utility to a risk averse investor in longer term instruments, not in short, relative to a random walk. Our results point to the existence of an unspanned volatility factor.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages75
Publication statusPublished - 1 Jul 2021
SeriesCREATES Research Papers
Number2021-11

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