||Predicting Interest Rate Volatility: Using Information on the Yield Curve
2015-05-08 , Hitotsubashi University Center for Financial Research
This version: May 8, 2015
This study examines whether information on the yield curve is useful for predicting volatility of the yield curve. The information is used within dynamic models by specifying the covariance matrix of changes in yield factors as nonlinear functions of the factors. Using such models, it is found that the information (1) is useful for predicting volatility of the slope factor, achieving the accuracy comparable to the GARCH model; (2) has incremental value for predicting volatility of the curvature factor when combined with a volatility-specific factor; (3) does not much improve prediction of volatility of the level factor once the volatility-specific factor is introduced.