This paper reexamines the issue of unspanned stochastic volatility (USV) in bond markets and the puzzle of poor relative pricing between bonds and bond options. I make a distinction between the "weak USV" and the "strong USV" scenarios, and analyze the evidence for each of them. I argue that the...

As more and more jurisdictions transition from LIBOR-type interest rate benchmarks to new riskfree rate (RFR) benchmarks based on overnight rates, such as SOFR in the US, it is important to adapt interest rate term structure models to reflect this. In particular, overnight rates are largely...

The term structure of equity return volatility fluctuates across time. It affects the term structure of equity returns through the volatility feedback effect and explains the cyclicality of equity return term structure. By analysing the dividend strip futures, this paper finds that volatility...

This paper presents a joint analysis of the term structure of credit default swap (CDS) spreads and the implied volatility surface. The rapid development of the CDS market has provided convenient products to extract credit risk, and its interaction with equity volatility has been analyzed in...

The problem of developing sensitivities of exotic interest rates derivatives to the observed implied volatilities of caps and swaptions is considered. It is shown how to compute these from sensitivities to model volatilities in the displaced diffusion LIBOR market model. The example of a...

Investors care about the probability density of tomorrow's Government bond yields, while the literature on term structure models has focused on monthly or weekly yields. Past literature has long since documented the Garch-type conditional heteroscedasticity of daily yields, but again the...

We find that interest rate variance risk premium (IRVRP) - the difference between implied and realized variances of interest rates - is a strong predictor of U.S. Treasury bond returns of maturities ranging between one and ten years for return horizons up to six months. IRVRP is not subsumed by...

We introduce the log-normal stochastic volatility (SV) model for the dynamics of a short interest rate in the Cheyette model. We assume non-zero correlation between the dynamics of the short rate and the log-normal SV driver for modelling positive implied volatility skews observed in...

In 2008, first suspicions arose that the London Interbank Offered Rate (LIBOR) had been systematically manipulated by financial institutions involved with its fixing; in June 2012, several major international banks officially admitted to this. The regulatory response could not have been...

This paper analyses the attributes and the significance of the roughness of oil market volatility. We employ unspanned stochastic volatility models driven by rough Brownian motions that yield semi-analytical prices for futures options entailing efficient calibration applications. By performing a...