A state-price volatility index for the U.S. government bond market

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Abstract

Using the Arrow–Debreu state‐contingent pricing methodology, this paper derives a U.S. government bond market volatility index (GBVX). I show that GBVX is an unbiased predictor for the next 30 day realised volatility of the Treasury note futures return. GBVX also subsumes the information of GARCH, EWMA and historical volatility measures. Furthermore, GBVX serves as an effective predictor for the future realised volatilities of a wide class of fixed income portfolios. The results suggest GBVX as a powerful instrument for volatility forecasting in the fixed income markets.
Original languageEnglish
Pages (from-to)573-597
Number of pages25
JournalAccounting and Finance
Volume58
Issue numberS1
Early online date24 Apr 2017
DOIs
Publication statusPublished - Nov 2018
Externally publishedYes

Keywords

  • Interest rate volatility
  • State-preference pricing
  • Volatility forecasting
  • Fixed income markets

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