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Estimating the Term Structure of Volatility in Futures Yield - A Maximum Likelihood Approach

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The volatility structure of 90-day bill futures traded on the the Sydney Futures Exchange is analysed within the framework of the Heath-Jarrow-Morton model. The method involves characterisation of the transition probability density function for the forward rate process represented by the stochastic differential equation in the arbitrage-free economy. Maximisation of the likelihood function then results in the estimates of the parameters of the volatility function. The volatility function is also used in a simulation of the preference-free stochastic differential equation for bill prices.

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  • Ram Bhar & Carl Chiarella, 1995. "Estimating the Term Structure of Volatility in Futures Yield - A Maximum Likelihood Approach," Working Paper Series 56, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    • Handle: RePEc:uts:wpaper:56
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    File URL: http://www.finance.uts.edu.au/research/wpapers/wp56.pdf
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    4. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
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    1. Ram Bhar & Carl Chiarella, 1996. "Construction of Zero-Coupon Yield Curve From Coupon Bond Yield Using Australian Data," Working Paper Series 70, Finance Discipline Group, UTS Business School, University of Technology, Sydney.

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