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.
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Christiansen, C., Strunk Hansen, C. Implied Volatility of Interest Rate Options: An Empirical Investigation of the Market Model. Review of Derivatives Research 5, 51–80 (2002). https://doi.org/10.1023/A:1013860216764
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DOI: https://doi.org/10.1023/A:1013860216764