## Are Interest Rate Derivatives Spanned by the Term Structure of Interest Rates? (2001)

Venue: | Journal of Fixed Income |

Citations: | 22 - 4 self |

### BibTeX

@ARTICLE{Heidari01areinterest,

author = {Massoud Heidari and Liuren Wu},

title = {Are Interest Rate Derivatives Spanned by the Term Structure of Interest Rates?},

journal = {Journal of Fixed Income},

year = {2001},

volume = {13},

pages = {75--86}

}

### OpenURL

### Abstract

We investigate whether the same finite dimensional dynamic system spans both interest rates (the yield curve) and interest rate options (the implied volatility surface). We find that the options market exhibits factors independent of the underlying yield curve. While three common factors are adequate to capture the systematic movement of the yield curve, we need three additional factors to capture the movement of the implied volatility surface. JEL Classification Codes: E43, G12. Key Words: Factors; principal component; LIBOR; swaps; swaptions; yield curve; implied volatility surface. We measure and interpret common factors underlying the US dollar LIBOR market that includes both interest rates and interest rate options. In particular, we investigate whether the same finite dimensional dynamic system spans both types of instruments. We find that the options market exhibits factors independent of the underlying yield curve. We identify three common factors from LIBOR and swap rat...