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UK Macroeconomic Volatility and the Term Structure of Interest Rates *
Author(s) -
Spencer Peter
Publication year - 2013
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/j.1468-0084.2012.00698.x
Subject(s) - volatility (finance) , economics , econometrics , forward volatility , volatility swap , implied volatility , volatility smile , macro , interest rate , stochastic volatility , monetary economics , computer science , programming language
This study uses a macro‐finance model to examine the ability of the gilt market to predict fluctuations in macroeconomic volatility. The econometric model is a development of the standard ‘square root’ volatility model, but unlike the conventional term structure specification it allows for separate volatility and inflation trends. It finds that although volatility and inflation trends move independently in the short run, they are cointegrated. Bond yields provide useful information about macroeconomic volatility, but a better indicator can be developed by combining this with macroeconomic information.