An Empirical Investigation of the Forward Interest Rate Term Structure

1999/07/20 by Andrew Matacz, Matacz, Andrew, Jean-Philippe Bouchaud +1
Physics and Astronomy · #Condensed Matter (cond-mat) #FOS: Physical sciences #cond-mat

paper · pdf · doi:10.48550/arxiv.cond-mat/9907297

34 pages, Latex + 17 EPS figures

arxiv created 1999/07/20 · arxiv updated 2009/11/30

Abstract

In this paper we study empirically the Forward Rate Curve (FRC) of 5 different currencies. We confirm and extend the findings of our previous investigation of the U.S. Forward Rate Curve. In particular, the average FRC follows a square-root law, with a prefactor related to the spot volatility, suggesting a Value-at-Risk like pricing. We find a striking correlation between the instantaneous FRC and the past spot trend over a certain time horizon, in agreement with the idea of an extrapolated trend effect. We present a model which can be adequately calibrated to account for these effects.

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