Finance Discipline Group
UTS Business School
University of Technology, Sydney

Working Paper Series

Title:
Interest Rate Futures: Estimation of Volatility Parameters in an Arbitrage-Free Framework
Author(s): Ram Bhar and Carl Chiarella
Date of publication: December 1995
Working paper number: 55
Abstract:
Hedging interest rate exposures using interest rate futures contracts requires some knowledge of the volatility function of the interest rates. Use of historical data as well as interest rate options like caps and swapoptions to estimate this volatility function, have been proposed in the literature. In this paper the interest rate futures price is modelled within an arbitrage-free framework for a volatility function which includes a stochastic variable, the instantaneous spot interest rate. The resulting system is expressed in a state space form which is solved using extended Kalman filter. The technique is applied to short-term interest rate futures contracts trading on the Sydney Futures Exchange as well as on the Tokyo International Financial Futures Exchange. The residual diagnostics indicate suitability of the model and the bootstrap resampling technique is used to obtain small sample properties of the parameters of the volatility function.
Paper: Download (Format: PDF, Size: 1.3 Mb)
Comments:
Published as: Bhar, R. and Chiarella, C., 1997, "Interest Rate Futures: Estimation of Volatility Parameters in an Arbitrage-Free Framework", Applied Mathematical Finance, 4(4), 181-199.
Known citations:

Aihara, S. I. and Bagchi, A., 2008, "Filtering and Identification of Affine Term Structures from Yield Curve Data", Working Paper.

Aihara, S. I. and Bagchi, A., 2010, "Identification of Affine Term Structures From Yield Curve Data", International Journal of Theoretical and Applied Finance, 13(2), 259-283.

Bhar, R., 2010, Stochastic Filtering with Applications in Finance, World Scientific.

Bhar, R. and Chiarella, C., 1996, "Construction of Zero-Coupon Yield Curve From Coupon Bond Yield Using Australian Data", Working Paper: 70, Finance Discipline Group, University of Technology, Sydney.

Bhar, R. and Chiarella, C., 2000, "Analysis of Time Varying Exchange Rate Risk Premia", In Christian L Dunis (ed) Studies in Computational Finance: Advances in Quantitative Asset Management, Vol. 1, 255-273.

Bhar, R. and Chiarella, C., 2006, "Estimation of the Heath-Jarrow-Morton Model Via the Kalman Flter: A Bootstrap Analysis", Working Paper.

Bhar, R., Chiarella, C., El-Hassan, N., Zheng, X., 2000, "The Reduction of Forward Rate Dependent Volatility HJM Models to Markovian Form: Pricing European Bond Option", Research Paper: 36, Quantitative Finance Research Centre, University of Technology, Sydney.

Bhar, R., Chiarella, C. and Pham, T., 2000, "Modeling the Currency Forward Risk Premium: Theory and Evidence", Research Paper: 41, Quantitative Finance Research Centre, University of Technology, Sydney.

Bhar, R., Chiarella, C. and To, T., 2002, "A Maximum Likelihood Approach to Estimation of Heath-Jarrow-Morton Models", Research Paper: 80, Quantitative Finance Research Centre, University of Technology, Sydney.

Bhar, R. and Hamori, S., 2005, "Forward FX Market and the Risk Premium", In Empirical Techniques in Finance, 193-213.

El Qalli, Y., 2010, "Recursive Bayesian Estimation in Forward Price Models Implied by Fair Pricing", International Journal of Theoretical and Applied Finance, 13(2), 301-333.

Gombani, A., Jaschke, S. R. and Runggaldier, "A Filtered No Arbitrage Model for Term Structures from Noisy Data", Preprint.

Gombani, A. and Runggaldier, W. J., 2001, "A Filtering Approach to Pricing in Multifactor Term Structure Models", International Journal of Theoretical and Applied Finance, 4(2), 303-320.

Quine, B. M., 2006, "A Derivative-Free Implementation of the Extended Kalman Filter", Automatica, 42(11), 1927-1934.