In this project, a model-free fixed income market volatility index calculation formula based on a solid mathematical proof is proposed. This formula can serve as a volatility indicator in the fixed income market, just as how VIX serves as a proxy in the equity market. Fixed income instruments with the highest trading volume are selected into the formula: 10-year treasury bonds, 1-year cap&floor 3M LIBOR options and 1*10 year swaption.
The newly created formula for fixed income volatility maps the macroeconomic news closely, meaning the index reacts to the news in a timely manner, which confirms the authentity of the formula.
Research Group (2016 Spring):
Qishu Zhang, Master in Financial Engineering, Graduated in May 2016
Runzhe Xu, Master in Financial Engineering, Graduated in May 2016
Heyu Gong, Master in Financial Engineering, Graduated in May 2016
Dr. Rupak Chatterjee
Fixed Income Volatility Index, Caps, Floors, TYVIX, SRVIX, Volatility Model
Firstly, there exists a significant divergence between the fixed income market and the equity market, which can be observed from plotting the two volatility indices in the same graph. Secondly, even within the fixed income market, different asset classes display significantly distinct behaviors. Lastly, because 1*10 year swaptions and 1-year caps and floors share the same underlying asset 3M LIBOR so they have higher correlation than any others. These three observations should serve as a good reference for investors in the future.