An affine term structure model for Turkish interest rate swap market: do swaps span volatility risk?

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2019

Author

Özbekler, Ali Genca

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We follow novel procedure of [4] to assess presence of unspanned stochastic volatility (USV) phenomenon in the Turkish lira interest rate swap (IRS) market. The estimations reveal that IRS yield curve dynamics fail to span volatility in IRS market and thus volatility risk cannot be hedged using only IRS instruments. The major implication of USV is then used to investigate the systemic volatility in domestic markets. In this scope, we employ USV condition as a speciﬁcation for afﬁne term structure (AFTS) models. Comparing AFTS models with stochastic and constant volatility, we ﬁnd that three-factor constant volatility model provides more robust estimation results in terms of both volatility and yield ﬁtting.

Subject Keywords

Consumer credit, Consumer credit Information technology., Afﬁne Term Structure Models, Term Premia, Stochastic Volatility, Systemic Volatility, Spanning Hypothesis.

URI

http://etd.lib.metu.edu.tr/upload/12623615/index.pdf
https://hdl.handle.net/11511/43947

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Graduate School of Applied Mathematics, Thesis

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Citation Formats

A. G. Özbekler, “An affine term structure model for Turkish interest rate swap market: do swaps span volatility risk?,” Thesis (M.S.) -- Graduate School of Applied Mathematics. Financial Mathematics., Middle East Technical University, 2019.