Economics, Econometrics and Finance
4 years ago

New method revolutionizes pricing of fixed income derivatives with volatility term structure.

RePEc: Research Papers in Economics
Estimating the term structure of volatility and fixed income derivative pricing
João Victor Issler

Paper Summary

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The article estimates the volatility of interest rates to price fixed income derivatives. Researchers used historical yield curves to estimate the term structure of volatility for US treasury rates from 1983 to 1995. They then calculated the parameters of the Gaussian model using non-linear least squares estimation. The results show how different parameters affect the pricing of bond options.