Volatility risk premium in the interest rate market: Evidence from delta-hedged gains on USD interest rate swaps

Cited 0 time in webofscience Cited 0 time in scopus
  • Hit : 350
  • Download : 0
This study examines whether the interest rate market compensates for volatility risk. It demonstrates that the delta-hedged gain (DHG) method introduced by Balcshi and Kapadia (2003) shows the existence and sign of DHG in the interest rate swap markets where they use measures different from what Bakshi and Kapadia assumed. This finding is applied to the USD interest rate swap and swaption market. The result shows that, over the short term, there is negative compensation for volatility risk premiums, aldn to the equity or currency markets. Over the long term, the signs of compensation change and regression tests show the possibility that the volatility risk premium in the interest rate market can be different from those in other asset markets. However, this interpretation entails an overlapping data problem that is not easy to overcome especially for the long term DHG data. The difference in interest rate market may be due to the fact that the interest rate swap market is different from the equity or currency markets in that it is more driven by financial institutions and option traders than by individuals or directional traders.
Publisher
ELSEVIER SCIENCE INC
Issue Date
2015-07
Language
English
Article Type
Article
Keywords

STOCHASTIC VOLATILITY; MODEL

Citation

INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS, v.40, pp.88 - 102

ISSN
1057-5219
DOI
10.1016/j.irfa.2015.03.018
URI
http://hdl.handle.net/10203/200700
Appears in Collection
MT-Journal Papers(저널논문)
Files in This Item
There are no files associated with this item.

qr_code

  • mendeley

    citeulike


rss_1.0 rss_2.0 atom_1.0