Information in the Term Structure of Yield Curve Volatility

Published

Journal Article

© 2016 the American Finance Association. Using a novel no-arbitrage model and extensive second-moment data, we decompose conditional volatility of U.S. Treasury yields into volatilities of short-rate expectations and term premia. Short-rate expectations become more volatile than premia before recessions and during asset market distress. Correlation between shocks to premia and shocks to short-rate expectations is close to zero on average and varies with the monetary policy stance. While Treasuries are nearly unexposed to variance shocks, investors pay a premium for hedging variance risk with derivatives. We illustrate the dynamics of the yield volatility components during and after the financial crisis.

Full Text

Duke Authors

Cited Authors

  • Cieslak, A; Povala, P

Published Date

  • June 1, 2016

Published In

Volume / Issue

  • 71 / 3

Start / End Page

  • 1393 - 1436

Electronic International Standard Serial Number (EISSN)

  • 1540-6261

International Standard Serial Number (ISSN)

  • 0022-1082

Digital Object Identifier (DOI)

  • 10.1111/jofi.12388

Citation Source

  • Scopus