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 JMF  Vol.5 No.3 , August 2015
Inferring Volatility from the Yield Curve
Abstract: In this paper, we assess how to recover the volatility of interest rates in the euro area money market, on the sole basis of the zero-coupon yield curve. Our primary result is that there exists an empirical regularity (linking rates and volatility) that takes a relatively simple mathematical form. We also show that the existence of such regularity cannot be explained by a reasoning based on the hypothesis of absence of opportunities of arbitrage since a continuous-time arbitrage-free model may produce instances of curves that are consistent with a continuum of level of volatilities. We exhibit an example for this.
Cite this paper: Brousseau, V. and Durré, A. (2015) Inferring Volatility from the Yield Curve. Journal of Mathematical Finance, 5, 304-314. doi: 10.4236/jmf.2015.53026.
References

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