This chapter provides a comprehensive introduction to the subject of fixed income market volatility and motivates its study. While equity market volatility has become the object of extensive research, relatively little is known about fixed income market volatility. The main theme of this book is to develop gauges of expected volatility in the fixed income space that are the counterparts to similar gauges in the equity market, such as the well-known VIX Index published by the Chicago Board Options Exchange. This introduction provides empirical evidence highlighting the contrast between the historical behavior of equity and fixed income market volatilities, as well as a preview of key methodological challenges that arise in developing indexes of expected volatility for the latter.
KeywordsInterest Rate Government Bond Volatility Index Fixed Income Variance Swap
- Bank of England (2008). Minutes of the Monetary Policy Committee Meeting, 6 and 7 August. Google Scholar
- Chicago Board Options Exchange (2009). The CBOE volatility index®—VIX®. White paper underlying the CBOE-VIX volatility index. Available from: http://www.cboe.com/micro/VIX/vixwhite.pdf.
- Mele, A., & Obayashi, Y. (2012). An interest rate swap volatility index and contract. Technical white paper underlying the CBOE interest rate swap volatility index. Available from: http://www.cboe.com/micro/srvix/default.aspx.
- Mele, A., & Obayashi, Y. (2013a). The price of government bond volatility. Swiss Finance Institute Research Paper No. 13–27. Google Scholar
- Mele, A., & Obayashi, Y. (2013b). Volatility indexes and contracts for Eurodollar and related deposits. Swiss Finance Institute Research Paper No. 13–25. Google Scholar
- Mele, A., & Obayashi, Y. (2013c). Credit variance swaps and volatility indexes. Swiss Finance Institute Research Paper No. 13–24. Google Scholar
- Mele, A., & Obayashi, Y. (2014). Interest rate variance swaps and the pricing of fixed income volatility. GARP Risk Professional: Quant Perspectives, 1–8. Google Scholar
- Mele, A., & Obayashi, Y. (2015). Interest rate derivatives and volatility. In P. Veronesi (Ed.), Handbook series in financial engineering and econometrics. The handbook of fixed income securities, New York: Wiley. Forthcoming. Google Scholar
- Mele, A., Obayashi, Y., & Yang, S. (2015b). Pricing options and futures on a government bond volatility index. Working paper, Swiss Finance Institute. Google Scholar
- Rhoads, R. (2011). Trading VIX derivatives. New York: Wiley. Google Scholar
- Veronesi, P. (2010). Fixed income securities. New York: Wiley. Google Scholar
- Walras, L. (1874). Éléments d’économie politique pure, ou théorie de la richesse sociale. Lausanne: Corbaz & Cie. English translation: Elements of Pure Economics, Homewood, Il.: R.D. Irwin (1954). Google Scholar