On the presence of unspanned volatility in European interest rate options

In a recent paper, Collin-Dufresne and Goldstein (2002) show that the movements of the yield curve and of interest rate derivatives are mostly uncorrelated, advocating the presence of unspanned volatility. This letter shows that their results can be explained in the framework of a Gaussian HJM model with humped term-structure volatility. This implies that hedging interest rate derivatives with interest rate swaps is not ruled out.

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Year of publication:	2005
Authors:	Renò, Roberto ; Uboldi, Adamo
Published in:	Applied Financial Economics Letters. - Taylor and Francis Journals, ISSN 1744-6546. - Vol. 1.2005, 1, p. 15-18
Publisher:	Taylor and Francis Journals

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Extent:	text/html
Type of publication:	Article
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10005495874