Forecasting swap rate volatility with information from swaptions

We examine the predictability of the model‐free implied volatility from swaptions on future realized volatility of the underlying swap rates. The model‐free implied volatility demonstrates significant predictability on future realized volatility of swap rates along a wide cross‐section of tenors. The predictive power of the model‐free implied volatility is superior to the predictability of lagged realized volatility and generalized autoregressive conditional heteroskedasticity‐type conditional volatility. The superior predictive power of the model‐free implied volatility also holds out‐of sample, in different market states and with longer forecasting horizons.