Academic Activities
[Research]The Zero Lower Bound and Economic Determinants of the Volatility Surface in the Interest Cap Markets
2017.06.01 Views 2892 경영학연구분석센터
Journal of Futures Markets
Volume 37, Issue 6, June 2017, Pages 578-598
Myeong-Hyeon Kim (a)(b), Changki Kim (c), Injun Hwang (c)
a Korea Housing & Urban Guarantee Corporation (KHUG), Busan, South Korea
b Asian Institute of Corporate Governance (AICG) at Korea University, South Korea
c Korea University Business School, Anam-dong, Seongbuk-Gu, Seoul, South Korea
http://onlinelibrary.wiley.com/doi/10.1002/fut.21829/abstract
Abstract
We address an important yet unanswered question: what would be the economic determinants of the implied volatility during the zero lower bound periods? To answer this question, we examine time variations of the cap market implied volatility and investigate economic determinants on slopes and curvatures of the implied volatility curves. We find that unexpected unemployment and inflation shocks play an important role in explaining implied volatility curves for different maturities. We associate negative jumps in the volatility dynamics (Jarrow, Li, & Zhao, 2007) with two unexpected macroeconomic shocks. Our results provide an important implication for practitioners who prepare future exit strategies. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:578–598, 2017.
Volume 37, Issue 6, June 2017, Pages 578-598
Myeong-Hyeon Kim (a)(b), Changki Kim (c), Injun Hwang (c)
a Korea Housing & Urban Guarantee Corporation (KHUG), Busan, South Korea
b Asian Institute of Corporate Governance (AICG) at Korea University, South Korea
c Korea University Business School, Anam-dong, Seongbuk-Gu, Seoul, South Korea
http://onlinelibrary.wiley.com/doi/10.1002/fut.21829/abstract
Abstract
We address an important yet unanswered question: what would be the economic determinants of the implied volatility during the zero lower bound periods? To answer this question, we examine time variations of the cap market implied volatility and investigate economic determinants on slopes and curvatures of the implied volatility curves. We find that unexpected unemployment and inflation shocks play an important role in explaining implied volatility curves for different maturities. We associate negative jumps in the volatility dynamics (Jarrow, Li, & Zhao, 2007) with two unexpected macroeconomic shocks. Our results provide an important implication for practitioners who prepare future exit strategies. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:578–598, 2017.