The Price of Fixed Income Market Volatility

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Springer, Jan 11, 2016 - Mathematics - 250 pages

Fixed income volatility and equity volatility evolve heterogeneously over time, co-moving disproportionately during periods of global imbalances and each reacting to events of different nature. While the methodology for options-based "model-free" pricing of equity volatility has been known for some time, little is known about analogous methodologies for pricing various fixed income volatilities.

This book fills this gap and provides a unified evaluation framework of fixed income volatility while dealing with disparate markets such as interest-rate swaps, government bonds, time-deposits and credit. It develops model-free, forward looking indexes of fixed-income volatility that match different quoting conventions across various markets, and uncovers subtle yet important pitfalls arising from naïve superimpositions of the standard equity volatility methodology when pricing various fixed income volatilities.

 

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Contents

Introduction
1
Variance Contracts Fixed Income Security Design
19
Interest Rate Swaps
59
Government Bonds and TimeDeposits
125
Credit
211
References
246
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About the author (2016)

Antonio Mele holds a Senior Chair at the Swiss Finance Institute, and is a full Professor of Finance at the University of Lugano, after having been a tenured faculty at the London School of Economics & Political Science for a decade. He is also a Research Fellow for the Financial Economics program at the Centre for Economic Policy Research (CEPR) in London. He holds a PhD in Economics from the University of Paris.

His academic expertise spans a variety of fields in financial economics, pertaining to capital market volatility, interest rates and credit markets, macro-finance, capital markets and business cycles, and information in securities markets. His research has been published by top journals in Finance and Economics such as the Journal of Financial Economics, the Review of Economic Studies, the Review of Financial Studies, and the Journal of Monetary Economics.

His work outside academia includes developing fixed income volatility indexes for Chicago Board Options Exchange. He is the co-inventor of the CBOE Interest Rate Swap Volatility Index (CBOE-SRVXSM) - the first standardized volatility measure in the interest-rate swap market, designed to standardize and simplify swap-rate volatility trading much in the spirit of the CBOE-VIX® index in the equity market.

Yoshiki Obayashi is a managing director at Applied Academics LLC in New York, specialized in developing and commercializing ideas emanating from a growing think-tank of academic researchers selected for their work's relevance to practice in the finance industry. His most recent projects range from running systematic trading strategies for funds to developing fixed income volatility indexes for Chicago Board Options Exchange.

Yoshiki Obayashi previously managed US and Asian credit portfolios for a proprietary fixed-income trading group at an investment bank. He holds a PhD in Finance and Economics from Columbia Business School.

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