Analytical Finance: Volume II by Jan R M Röman

Author:Jan R M Röman
Language: eng
Format: epub
Publisher: Springer International Publishing, Cham

Then we compute the daily standard deviation of yields

where is the mean value of X t and T the number of measurements (maturity). Some market practitioners argue that in forecasting volatility the expected value or mean that should be used in the formula for variance is zero.

Next, we annualize the standard deviation of yields

where D is the number of trading-days per year. Analysts can use different number of days in a year in this step, but the usual practice is to exclude holidays (∼ 10 days a year) from calculations, so that the number of trading days is holidays = 250 trading days.

How do we interpret yield volatility? Let us assume, for example, that the annualized interest rate volatility of a 5-year note is 10%. Further, let us assume that currently the yield on this note is 2%. The standard deviation of interest rates on this bond would then equal 10% x 2% = 0.2% (20 basis points). Having calculated this standard deviation, an analyst would be able to estimate the confidence interval for interest rates. For example, a 95% confidence interval can be estimated as .

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.