IDEAS home Printed from https://ideas.repec.org/a/taf/apfiec/v12y2002i9p667-672.html
   My bibliography  Save this article

The effect of interest rate volatility on treasury yields

Author

Listed:
  • Sudipto Sarkar
  • Mohamed Ariff

Abstract

There is a substantial literature on the level and volatility of interest rates. However, there is no agreement to date on the relationship between the two, e.g., whether higher interest rate volatility will result in higher or lower bond yields. Further, there is virtually no research on the role of maturity in this relationship. It is hypothesized that, because of the stochastic nature of interest rates and the embedded option associated with the government's ability to time its borrowings, there should be a negative relationship between interest rate volatility and Treasury yields. Moreover, this negative relationship should be stronger for longer-maturity bonds, everything else held constant. This hypothesis is tested empirically, using bond yield data from the US Treasury market. The main finding is that interest rate volatility does indeed have a significant negative effect on bond yields, and the significance is greater for 20-year bonds than for 10-year bonds, as hypothesized. This result adds a wrinkle to the already complicated policy issue of what range of interest rate volatility is desirable from a 'social optimum' standpoint.

Suggested Citation

  • Sudipto Sarkar & Mohamed Ariff, 2002. "The effect of interest rate volatility on treasury yields," Applied Financial Economics, Taylor & Francis Journals, vol. 12(9), pages 667-672.
  • Handle: RePEc:taf:apfiec:v:12:y:2002:i:9:p:667-672
    DOI: 10.1080/09603100010018759
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/09603100010018759
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: https://libkey.io/10.1080/09603100010018759?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Leahy, J.V., 1991. "The Optimality of Myopic Behaviour in a Competitive Model of Entry and Exit," Harvard Institute of Economic Research Working Papers 1566, Harvard - Institute of Economic Research.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Covarrubias, Guillermo & Ewing, Bradley T. & Hein, Scott E. & Thompson, Mark A., 2006. "Modeling volatility changes in the 10-year Treasury," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 369(2), pages 737-744.
    2. Billio, Monica & Dufour, Alfonso & Segato, Samuele & Varotto, Simone, 2023. "Complexity and the default risk of mortgage-backed securities," Journal of Banking & Finance, Elsevier, vol. 155(C).
    3. Asif Mahmood, 2016. "Transmission of Volatility of Money Market Overnight Repo Rate along the Yield Curve in Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 12, pages 1-18.
    4. Emel Siklar & Ilyas Siklar, 2021. "Time Series Dynamics of Short Term Interest Rates in Turkey," Business and Economic Research, Macrothink Institute, vol. 11(1), pages 92-108, March.
    5. Alexius, Annika, 2004. "Far Out on the Yield Curve," Working Paper Series 2004:12, Uppsala University, Department of Economics.
    6. Emenike Kalu O., 2017. "The Interrelationship between Crude Oil Price Volatility and Money Market Rate Volatility in a Developing, Oil-Producing Economy," Eastern European Business and Economics Journal, Eastern European Business and Economics Studies Centre, vol. 3(1), pages 28-47.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Michele Moretto & Gianpaolo Rossini, "undated". "Start-up entry strategies: Employer vs. Nonemployer firms," Working Papers ubs0409, University of Brescia, Department of Economics.
    2. Caballero, Ricardo J & Pindyck, Robert S, 1996. "Uncertainty, Investment, and Industry Evolution," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(3), pages 641-662, August.
    3. Robert S. Pindyck & Andrés Solimano, 1993. "Economic Instability and Aggregate Investment," NBER Chapters, in: NBER Macroeconomics Annual 1993, Volume 8, pages 259-318, National Bureau of Economic Research, Inc.
    4. Roy Cerqueti, 2012. "Financing policies via stochastic control: a dynamic programming approach," Journal of Global Optimization, Springer, vol. 53(3), pages 539-561, July.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:apfiec:v:12:y:2002:i:9:p:667-672. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAFE20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.