Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/67881 
Year of Publication: 
2006
Series/Report no.: 
Queen's Economics Department Working Paper No. 1188
Publisher: 
Queen's University, Department of Economics, Kingston (Ontario)
Abstract: 
We study the relation between realized and implied volatility in the bond market. Realized volatility is constructed from high-frequency (5-minute) returns on 30 year Treasury bond futures. Implied volatility is backed out from prices of associated bond options. Recent nonparametric statistical techniques are used to separate realized volatility into its continuous sample path and jump components, thus enhancing forecasting performance. We generalize the heterogeneous autoregressive (HAR) model to include implied volatility as an additional regressor, and to the separate forecasting of the realized components. We also introduce a new vector HAR (VecHAR) model for the resulting simultaneous system, controlling for possible endogeneity of implied volatility in the forecasting equations. We show that implied volatility is a biased and inefficient forecast in the bond market. However, implied volatility does contain incremental information about future volatility relative to both components of realized volatility, and even subsumes the information content of daily and weekly return based measures. Perhaps surprisingly, the jump component of realized bond return volatility is, to some extent, predictable, and bond options appear to be calibrated to incorporate information about future jumps in Treasury bond prices, and hence interest rates.
Subjects: 
bipower variation
bond futures options
HAR
Heterogeneous Autoregressive Model
implied volatility
jumps
realized volatility
VecHAR
volatility forecasting
JEL: 
C22
C32
G1
Document Type: 
Working Paper

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