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Rev Fin 1997; 10:333-367
© 1997 the Society for Financial Studies

Article

Inferring future volatility from the information in implied volatility in Eurodollar options: a new approach

KI Amin and VK Ng1
Lehman Brothers, USA
1 Corresponding author at Goldman Sachs & Co., Fixed Income Research 25/F, 85 Broad Street, New York, NY 10004, USA

Abstract

We study the information content of implied volatility from several volatility specifications of the Heath-Jarrow-Morton (1992) (HJM) models relative to popular historical volatility models in the Eurodollar options market. The implied volatility from the HJM models explains much of the variation of realized interest rate volatility over both daily and monthly horizons. The implied volatility dominates the GARCH terms, the Glosten et al. (1993) type asymmetric volatility terms, and the interest rate level. However, it cannot explain that the impact of interest rate shocks on the volatility is lower when interest rates are low than when they are high.


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