Review of Derivatives Research

, Volume 5, Issue 1, pp 51–80 | Cite as

Implied Volatility of Interest Rate Options: An Empirical Investigation of the Market Model

  • Charlotte Christiansen
  • Charlotte Strunk Hansen
Article

Abstract

We analyze the empirical properties of the volatilityimplied in options on the 13-week US Treasury bill rate. These options havenot been studied previously. It is shown that a European style put optionon the interest rate is equivalent to a call option on a zero-coupon bond.We apply the LIBOR market model and conduct a battery of validity tests tocompare three different volatility specifications: contact, affine, and exponentialvolatility. It appears that the additional parameter in the affine and theexponential volatility function is not justified. Overall, the LIBOR marketmodel fares well in describing these options.

implied volatility interest rate options LIBOR market model market efficiency volatility forecasting zero-couponbond options 

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Copyright information

© Kluwer Academic Publishers 2002

Authors and Affiliations

  • Charlotte Christiansen
    • 1
  • Charlotte Strunk Hansen
    • 2
  1. 1.Department of FinanceThe Aarhus School of BusinessDenmark
  2. 2.School of Economics and ManagementUniversity of AarhusDenmark

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