Interest Rate Volatility Shapes Term Structure, Impacts Financial Markets.
The article presents a model that looks at how interest rate volatility affects the term structure. By focusing on short-term interest rates and their volatility, the model can explain various aspects of the term structure. The researchers found that the relationship between yields and volatility is crucial in understanding the term structure. They also developed formulas for discount bond options and tested the model using a specific method, which confirmed the validity of the two-factor model.