On the Presence of Unspanned Volatility in European Interest Rate Options
Journal
Applied Economic Letters
ISSN
1350-4851
ISSN-Digital
1466-4291
Type
journal article
Date Issued
2005-08-16
Author(s)
Renò, Roberto
;
Uboldi, Adamo
Abstract
In a recent paper, Collin-Dufresne and Goldstein (2002) show that the movements of the yield curve and of interest rate derivatives are mostly uncorrelated, advocating the presence of unspanned volatility. This letter shows that their results can be explained in the framework of a Gaussian HJM model with humped term-structure volatility. This implies that hedging interest rate derivatives with interest rate swaps is not ruled out.
Language
English
HSG Classification
not classified
Refereed
No
Publisher
Routledge
Publisher place
Abingdon
Volume
1
Number
1
Start page
15
End page
18
Pages
4
Subject(s)
Division(s)
Eprints ID
12642